Saturday, November 11, 2006

Deficiencies of the VAT system

The system of VAT (Value Added Tax) that we have today in the country is called the dual VAT system because the Centre levies VAT in Excise and the States levy VAT on Sale of goods.

Although dual VAT removed some of the weaknesses in the former Union excise duties and the sales taxes, the present system is prima facie having some inherent weaknesses. They include:

  1. It continues to have the cascading effect on one another. The Central VAT levied at the manufacturing level will cascade when the state VAT is levied on the CenVAT inclusive price.
  2. Dual VAT causes vertical tax externality due to taxation of the same base by the two tiers of government. That is the tax policy decision of one level of government affects the tax base of the other.
  3. The system is loaded against the manufacturers as they have to deal with two tax authorities.
  4. There is a vertical imbalance in the assigned taxation powers under the Constitution. Most buoyant sources of tax revenue have been assigned to the Centre. It is estimated that the Centre collects approximately 65% of the tax revenues in India while all the states put together collect about 35%.

Read the full article which suggests a new form of taxation in the form of a comprehensive GST (Goods and Services Tax) here.