the audit trail. It may be noted that one of the advantages of VAT system, as we would bedealing later on, is the audit trail that is created in the VAT chain.2. Presence of a large number of tax deferral and holiday schemes, which resulted in anarrow base. It may again be noted that under VAT, which is multi-point, the tax rateshave to be reasonably low, and lower tax rates presupposes that the tax base is wide.These two features were not present in the Maharashtra tax regime.3. Low level of awareness among traders, and even administrators, giving rise to fearsand apprehensions. Owing to this, there was considerable consternation among the trade,which gave rise to open revolt against the system.4. Partial implementation of the ideal VAT with the existing system coexisting evenunder this regime.5. Increased burden on retailers of Bookkeeping and compliance.6. Multiplicity of rates of tax under the VAT regime.7. Drop in revenue for the State Government, though there are no studies attributing suchreduction to the system of taxation.Thus States had indeed tried some variations of VAT, but eventually gave up due to avariety of reasons.
VAT - The Global Meaning
Globally, VAT is regarded as a tax that is best levied by the Central government - a condition thatis difficult to meet in a federal finance system such as ours. It is true that 123 countries haveadopted VAT, but most of them have unitary systems of government. VAT is a centrally-administered tax with a revenue-sharing mechanism. It is hard to visualise VAT as a revenue-neutral measure, or one where the states will not lose out in relation to the present system, in afederal set-up.If VAT is Centrally administered, the tax base is quite wide, comprising imports, production anddifferent stages of sales. If the base is divided between the Centre and states, the chain isbroken, making tax evasion easier and affecting the states' tax base. In countries where VAT isadministered by a federal government, revenue collection on imports accounts for a larger portionof total VAT revenues. In an IMF study of 22 developing countries, it was discovered that in abouttwo-third of them, more than half the VAT revenue was collected from imports. In Pakistan andBangladesh, VAT collection from imports was 64 per cent of the total proceeds from the tax. Astax evasion on bulk imports is difficult, it also helps in checking tax evasion at subsequent stagesof the tax chain.
Necessity of VAT in India
India, particularly the trading community, has believed in accepting and adopting loopholes in anysystem administered by the state or the Centre. If a well-administered system comes in, it willclose avenues for traders and businessmen to evade paying taxes. They will also be compelledto keep proper records of their sales and purchases.