By Arjit Sethi
It is for the good of its subjects that the government levies Tax. Just as the sun takes water from the Earth to give it back a million times.
A really progressive and welfare oriented country should balance the requirements of direct and indirect taxes in a fair manner. Too much dependence on direct taxes will be repressive but at the same time passing heavy burdens to the general public by way of indirect taxes will constitute hardships to the common citizen. Therefore, economic administrators throughout the world have been constantly engaged in the exercise of lightening the burden of indirect taxes on the ultimate consumers.
Suppose, for manufacturing a product A, the manufacturer has to purchase four types of commodities B, C, D and E on which he pays excise duty1. When ultimately he sells his manufactured product A, on which he has to discharge his liability towards excise, the excise duty leviable on such product will be on a tax base which will include excise duties paid by the manufacturer on products B, C, D and E. Thus, the final excise duty is a duty on duty, which will increase the cost of production as well as the price of the final product.
Suppose, we find a method by which the excise duties paid on commodities B, C, D and E are allowed to be set-off from the final duty liability on product A, it is obvious that the manufacturer will not only be able to avoid payment of duty on duty but the cost of the product will also be reduced leading to a benefit to the consumer. This is the origin of Value added tax (VAT).
In simple words, the tax will be levied and collected at each stage of manufacture only on the value added by the manufacturer represented by the purchase value and the value of the work performed on such purchased commodities. This will not only result in cost reduction but will also ensure equity. What we have talked about is a value added tax on manufacture. In the same way, there can be a value added tax in respect of trading in commodities also.
In other words, the various taxes paid on inputs purchased will be allowed as a credit and will be allowed to be set off against the tax liability on the value of sales of the commodity. Thus, there can be a system of VAT in respect of manufacture and in respect of sales. In the same way, one can think of a system of VAT in dealing with input and output services. When the individual systems of manufacturing, sales and services VAT are ultimately combined to form a grand system of VAT on goods and services, such a VAT system will be applicable throughout the country as a common market.
Finally, State-Level VAT was introduced on 01.04.2005 by a majority of the States. The States have passed State-Level VAT legislations which are modeled on the draft model VAT law, prescribed by the Central Government. The legislations also incorporate the various principles of State-Level VAT as contained in the White Paper released by the Empowered Committee. However, such State Legislations contain provisions to cater to the specific needs of the State finances.
With the introduction of State-Level VAT system, it is proposed to phase out the Central sales tax (CST). However, since the states will stand to lose large revenue on account of its discontinuance a mechanism is being thought of for compensating the States for such loss of revenue.
Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
Arjit Sethi did his schooling from DPS R.K.Puram. Currently, he is a student member of The Institute of Chartered Accountants of India. He represented his school and received the Gobartimes Award from Mrs. Sheila Dixit. He also secured the School Rank 1 in the International Mathematics Olympiad. He belongs to New Delhi and has a great fondness for the street food as most of the Delhiites, and is addicted to soccer. The best thing he likes about himself is his punctuality. He is extremely attracted to the Indian Bureaucracy and has a great desire to be its part one day.