A report on Value Added Tax
Value Added Tax originated in France in 1954 and is under
implementation in more than hundred countries. Value Added Tax is
perceived by many as means to promote neutrality and uniformity of tax
burden and to provide incentives for increased productivity and
industrialization. The spread of VAT to the developed and the
developing countries alike certainly, makes for an interesting study.
Financial Times (London) too stressed the growing importance of VAT
when it observed in its centennial review “The economic and
technological changes of the second half of the century have made VAT
the quintessential modern tax”. It will not be an exaggeration if one
were to say that the emergence of the VAT as an important and elastic
source of revenue over the last four decades is unparalleled in the
history of taxation.
Despite the widespread proclamation of VAT, there have been
difficulties in implementing VAT in its true spirit like in the case
of Argentina, Brazil, Canada and India. VAT has been introduced in
more than 120 countries – developed, developing and those economies,
which are in transition. There have also been attempts to introduce
Value Added Tax in USA, which however has preferred to retain the
Retail Sales Tax system. Yet, those difficulties notwithstanding, it
can be said that Value Added Tax system definitely has its advantages
and is certainly recommended for most economies, particularly the
“Value Added Tax is a tax on the value added at each stage of
production and distribution process and can be aptly defined as one of
the forms of consumption taxation since the value added by a firm
represents the difference between its receipts and cost of purchased
Need for VAT
Value Added Tax is one of the most radical reforms that have been
proposed for the Indian economy after years of political and economic
debate. The reasons for advocating Value Added Tax is that it will
replace a complicated tax structure that will also do away with the
fraudulent practices. Following are some of the most important
benefits if VAT is introduced.
• VAT will encourage and result in a better-administered system that
will close avenues of tax evasion. The taxpayers will also be
compelled to keep proper records of their sales and purchases. VAT
actually provides an incentive to traders for paying taxes.
• VAT avoids the problem of under valuing as all stages of production
and distribution are subject to a tax. Under the VAT system, no
exemptions will be given and a tax will be levied at each stage of
manufacture of a product. At each stage of value-addition, credit can
be claimed on tax paid on inputs.
• It does not distort the business decisions as it does away with
cascading. Only market forces rather than tax structure will guide
vertical integration decisions once VAT is implemented.
• VAT permits easy and...