January 25, 2005


VAT's the way in India: After years of consultation among the different levels of government, India is finally moving to a system of value added taxes from April. If the transition is handled properly and a few loose ends tied up, the country's abysmal tax receipts should rise appreciably. (Kunal Kumar Kundu, 1/25/05, Asia Times)

Since there will be only one administering authority for taxation, it won't be necessary to maintain separate sets of records. This will substantially reduce paperwork and record keeping. If well-administered, the new system will close avenues for traders and businessmen to evade paying taxes. They will also be compelled to keep proper records of their sales and purchases. Under VAT, 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, the tax levied on the inputs can be claimed back from the tax authorities. Under this system, tax evasion will become difficult as there would be a streamlined accounting and audit trail and also because the dealer will not be able to claim tax credit for any tax paid on his inputs unless he collects tax on his sales.

Thus, even if one talks of 50,000 traders who have used loopholes in the system to evade tax payments of approximately Rs1 million annually, the sum expected to be brought back into the system could run into hundreds billions. VAT, therefore, has the potential to bring in huge revenues, reducing the fiscal deficit. The government's borrowing program could thus ease and states can focus on issues like poverty, healthcare and education. Higher tax collection can also lead to lower tax rates in the future.

VAT will replace the existing system of inspection by a system of built-in self-assessment by traders and manufacturers. This is likely to improve tax compliance and revenue collection. The industry will be helped by this new system in that the system of input tax credit will promote production efficiency of investments. Thus investment decisions would not have to be based on tax differentials or tax holidays. Companies can start optimizing purely on logistics of their operations and not bother about tax-minimization. This would put an end to the unhealthy tax competition among states and help integrate the domestic market. Also, reduced transit times and lower inventory levels will boost corporate earnings. Moreover, with a globally accepted tax administrative system, India will be able to integrate better with the World Trade Organization regime.

Posted by Orrin Judd at January 25, 2005 5:22 PM
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