Academic journal article ASBM Journal of Management

An Appraisal of State-VAT in India

Academic journal article ASBM Journal of Management

An Appraisal of State-VAT in India

Article excerpt


Value added tax is an indirect tax on consumption. VAT is charged and collected at each stage of the production/processing/trading, on the portion of the value added in the goods sold. It contemplates rebating tax paid on inputs (capital goods) and on account of this, it does not have any cascading effect.

Value Added Tax was first introduced in France in 1954; but initially it was not a complete system of VAT, since it applied only to transactions entered into by manufactures and wholesalers. Later it was supplemented by a separate tax on services. A full-fledged VAT was initiated first in Brazil in mid 1960's, then in the European countries in 1970's and subsequently introduced in about 136 countries including several federal countries.

VAT was extended to activities such as energy and construction duringl954 to 1963. In January 1968, reforms were initiated for generalising VAT to all industrial, agricultural and commercial activities. It was extended to all transactions formerly subject to the local tax and to the tax on services, which were then abolished.

Development of VAT in other countries has been gradual. Most of the countries had not adopted VAT till the sixties. VAT has come to occupy an important place in the first fiscal storage over the years in nearly all industrialised countries. This has led to many countries to adopt VAT as their major form of consumption tax. Thus, the augmentation of interest in VAT has been the most remarkable event in the evolution of commodity taxes in the present century. Over 136 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it.

Literature Survey

In India, there has been a VAT system in respect of Central excise duties, introduced by the Government of India for approximately the last ten years. The first preliminary discussion on State-level VAT took place in a meeting of Chief Ministers convened by Dr. Manmohan Singh, the then Union Finance Minister in 1995. In this meeting, the basic issues on VAT were discussed and this was followed up by periodic interactions of State Finance Ministers. Thereafter, in a significant meeting of all Chief Ministers, convened on November 16, 1999 by Shri Yashwant Sinha, the then Union Finance Minister, three important decisions were taken.

* Before the introduction of Statelevel VAT, the unhealthy sales tax rate "war" among the States would have to end and sales tax rates would need to be harmonised by implementing uniform floor rates of sales tax for different categories of commodities with effect from January 1, 2000.

* The sales-tax-related industrial incentive schemes would also have to be discontinued with effect from January 1, 2000.

* On the basis of achievement of the first two objectives, steps would be taken by the States for introduction of State-level VAT after adequate preparation.

For implementing these decisions, an Empowered Committee (EC) of State Finance Ministers was set-up.

The Empowered Committee meets regularly, attended by the State Finance Ministers, and also by the Finance Secretaries and the Commissioners of Commercial Taxes of the State Governments as well as senior officials of the four revenue CTD of the ministry of Finance, Government of India. Through repeated discussions and collective efforts in the Empowered Committee, it was possible within a period of about a year and a half to achieve nearly 98 per cent success in the first two objectives of harmonisation of sales tax structure through implementation of uniform floor rates of sales tax, and decision on incentives. The Empowered Committee takes up the matter with the concerned State and also the Government of India for necessary rectification.

Steps have been initiated by the EC for systematic preparation for the introduction of State-level VAT. In order to avoid competition among the States, attempts have been made from the beginning to harmonise the VAT design in the States keeping also in view the distinctive features of each State and the need for federal flexibility. …

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