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VAT of Commodities

VAT of Commodities

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Published by: snsgm on Sep 21, 2009
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11/28/2012

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CHAPTER IIVALUE ADDEDTAXATION OFCOMMODITIES
 
CHAPTER II
VALUE ADDED TAXATION OF COMMODITIES
2.1 The erstwhile belief that increase in the proportion of direct taxes(income taxes, corporate taxes etc.) in a country’s tax structure is an indicator of economic development has been somewhat tempered by better understanding of the disincentive effects of progressive income and capital taxation onentrepreneurial and risktaking behaviour. Despite successful imposition of directtaxes in advanced countries, the debate on the replacement of income tax by someform of consumption tax has continued (1). Such a reform is expected to fostersavings, investment and economic growth. The experience of some developedcountries has been that consumption taxes offer a painless, effective instrumentfor raising substantial revenues from a buoyant and generalised tax base thatpractically covers the entire population, with minimal distortions indecisionmaking by economic agents. A limited degree of progressivity is alsopossible through rate differentiation for goods consumed by various incomegroups. Today, therefore, taxes on consumption account for a significant share of tax revenues even in countries which have a long tradition of successful incometaxation.2.2 Value added taxation has emerged as the most effective mechanismworldwide for levying and administering taxes on consumption. Most countrieshave adopted the value added tax structure of commodity taxation because of itsnon-distortionary impact on resource allocation and decisionmaking by economicagents, self-policing nature, revenue productivity, ease of administration andcompliance facility. A detailed presentation of the VAT mechanism and itsseveral advantages has already been made in the first report of the Commission.In unitary countries, it is possible to effectively put inplace an economically neutral VAT that is easy to administer and difficult toevade.Federal countries could, however, be faced with special problems while adoptingVAT if, under the Constitutional division of fiscal powers between governmentlevels, States are permitted to levy all or some taxes on consumption.2.3 Table I taken from Bird and Gendron (2001) furnishes the variousmethods in vogue for taxing sales at two levels of government. As they have noted,five possible methods exist and none is totally satisfactory. These are:-regional sales tax (U.S. and some Canadian provinces)-Central sales tax (Germany and Switzerland)-two distinct tax bases for the Centre and the States (five Canadian provinces,Brazil, India and Argentina)-dual VATs with harmonised bases and some common rates (Quebec in Canada)-joint or concurrent federal-State VAT (in three Canadian provinces)------------------------------------------------------------------------------------------------------------(1) See for example Sijbren Cnossen “Taxing Consumption: Some Reflectionson the U.S. Debate”, paper presented in the conference on Monetary and FiscalPolicy, Poverty and Public Policy, held on 17
th
and 18
th
January 2001 at theInstitute for Social and Economic Change, Bangalore.
 
 
Table I
Sales taxes in federal countriesCountry Federal VAT State sales taxesType of State tax
Developed federations
Australia yes noall VAT revenuegoes to StatesCanada yes yessome have VATs,some have RSTGermany yes noStates share in VATrevenueAustria yes noStates share in VATrevenueSwitzerland yes nononeBelgium yes nononeUnited States no yesmost have RSTsDeveloping federationsArgentina yes yesgross receipts taxes*Brazil yes (limited) yesVAT (origin base) *India no (CENVAT)yesmost States atproducer level (as iscentral tax)* States also receive a share of federal VAT revenues.Source: "VATs in Federal Countries: International Experience andEmerging Possibilities" Richard M. Bird and Pierre-Pascal Gendron inthe Bulletin of the International Bureau of FiscalDocumentation July20012.4 For federations in which States are empowered to levy consumptiontaxes, there could be two major obstacles to the adoption of VAT:-the relative fiscal powers of national and sub-national governments (this issuearises only when the consumption tax power is shared by both levels)

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