Vat in India
December 4th, 2007 | by The Vat Man |VAT was introduced in the year 2005 in India. VAT (Value added Tax ) is levied on all goods & services .VAT will replace the present sales tax in India. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For a Vat reclaim service company see Global VAT Reclaim, work in Ireland..
Every government turns to an array of forms of public finance ,to aid the fiscal deficit and ever increasing public expenditure. The revenue of Indian government largely comprises of taxes. Over the last three fiscal years about 57% has come from customs and excise collections. Direct taxes such as corporate and income taxes contributed to 40%.
Fiscal Deficit
1990-91 1996-97 2004-05 2005-06
Revenue Deficit 4.2 3.6 3.9 2.7
Fiscal Deficit 9.4 6.4 7.9 4.3
Primary Deficit 5.0 1.3 0.5 0.5
Source: RBI
Many sections hold the view that the trading community has been amongst the biggest offenders when it comes to evading taxes. 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, the tax levied on the inputs can be claimed back from the tax authorities. One particular advantage is that of the widening of the tax base by bringing all transactions into the tax net.
In fact direct tax are suitable to design a progressive tax structure, given the extreme inequitable income distribution in developing countries. Studies on tax reforms reveal that the tax systems in developing economies have not yielded more revenue. Finally the impact of tax reforms is regressive.
Specifically, VAT gives the new government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous regime. In India Tax Credit method is followed. VAT can be computed by using either of the three methods detailed below
• The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input.
• The Addition method: The value added is computed by adding all the payments that is payable to the factors of production (viz., wages, salaries, interest payments etc).
• Tax credit method: This entails set-off of the tax paid on inputs from tax collected on sales
Originally it was planned that VAT would be simultaneously be implemented across all the states. However a few states decided to opt out of VAT system. This has led to shift of trade between states due to differences in the rate structures between states having VAT system and those having sales tax system. It was expected that there would be loss of some revenue to the states in the initial years, but the Centre has come forward to compensate the states for the revenue loss.
Sales tax has always been one of the main contributors to both the State and the Central exchequers. While its basic role is that of a revenue generator, it can also be used as a driver of development and trade. The introduction of VAT in India is for two reasons. First it will form part of the fiscal consolidation strategy for the country at macro level. Second, VAT will help India in the International trade. Thus, VAT is beneficial in the long run with its high revenue-income elasticity. It is a rationalized tax structure, practiced and proven to be successful in many leading economies.
For details on Vat reclaim contact us, life in Ireland.