ADDRESS ON

VALUE ADDED TAX

Y.K. Sabharwal,
Chief Justie !f "#$ia

Introduction
It gives me immense pleasure to address this All India Conference on the subject
of Value Added Tax. The era of liberalization that was ushed in the early !"s through
the introduction of economic reforms is perhaps the most significant event in the
economic history of India. In the last #$ years% we have ta&en giant strides in intergrating
our economy with the 'ew International (conomic order. The unification of our mar&ets
with the international mar&ets has created tremendous opportunities for Indian industry
and paid rich economic dividends to the nation. Today% there seems no dispute that India
will soon emerge as a major international econmic power and join the league of the
world"s most developed nations. It does seem that the introduction of VAT would have
positive ramifications for our economic growth and national development. The success
of VAT is well recognized from the fact that more than #)! countries around the world
follow this system. *ntil recently% it was only the *nited +tates and India amongst the
more populous countries that did not follow VAT. ,owever% this has now changed and
India has reformed its tax regime.
-ight at the outset% however% we must note that for the successful
implementation of VAT% it is important that there be constant dialogue between all the
sta&eholders regarding issues related to VAT and its implementation. This includes legal
and tax professionals% companies% traders% consumers and the +tate governments. I am
confident% that forums such as this would go a long a way in generating that dialogue. In
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this regard% we must commend the efforts of the +ales Tax .ar Association% its office/
bearers and members for ta&ing such an initiative.
The VAT Model
The VAT regime being implemented in India is based on the fundamental norm
of 0set/off1 for the tax paid earlier through the input tax credit mechanism. In the existing
sales tax structure% there are problems of double taxation of commodities and multiplicity
of taxes% resulting in a cascading tax burden.
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2or instance% under the original system%
before a commodity is produced% inputs are first taxed% and then after the commodity is
produced with input tax load% output is taxed again. This causes double taxation. *nder
the VAT regime% however% a set/off is given for input tax as well as tax paid on previous
purchases. (ntities engaged in the manufacturing and trading of goods are able to claim
tax credit on the materials and services that they buy to ma&e further supplies or
services directly or indirectly sold to end/users.
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This prevents the 4cascading effect of
taxes" on the production and distribution processes of goods and services and
encourage economic growth. In essence% this prevents overall distortions in the taxation
regime.
The impact of VAT on the Integration of the Domestic Market
,owever% it is essential that we ensure that regional disparities do not distort the
benefits of this economic boom. To ensure regional parity in national development% there
is need for intergrating domestic mar&ets to ensure smooth inter/state trade and
commerce. In this context% the introduction of the state level VAT system is a laudable
change in the indirect taxation system as it leads to harmonization of state taxation
regimes across the board. As experiences in the (uropean *nion have shown% the
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White Paper on State Level VAT, Empowered Committee of State Finance Ministers, an!ar" 1#, $%%&'
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www'wi(ipedia'com
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harmonization of the taxation system through intiatives li&e VAT is a crucial step in the
unification of domestic mar&ets. I am confident that even in India% VAT will play an
important role in the intergration of the domestic mar&et and boost inter/state trade and
commerce.
VAT Leads To Better Tax Administration and Compliance
The VAT design will significantly bring in simplicity and transparency in the tax
structure% thereby improving tax/compliance and eventually boosting the revenue growth
of state governments. The hallmar& of the VAT system is that VAT liability will be self/
assessed by the dealers themselves in terms of submission of returns upon setting off
the tax credit. The existing system of compulsory assessment at the end of each year
will be discontinued. Compulsory assessments will now be limited to a few cases where
a specific notice is issued. This would ma&e tax administration simpler and reduce the
costs involved in revenue collection.
This system of self/assessment will be supplemented by audited mechanism
where the assessments of a certain number of traders% selected on a scientific basis% will
be assessed every year. This will ensure accountability and transparency in the system
while avoiding undue harassment of traders and dealers.
5ue to the inherent transparency and accountability in the system% VAT leads to
not only better tax administration but also higher levels of compliance and lesser
evasion. Tax evasion is a grave problem in a developing country li&e ours as it leads to a
creation of a 4resource crunch" for developmental activities of the state. -eputed
international institutions li&e the 6orld .an& and I72 point out that the VAT regime
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prevents tax evasion and boosts revenues to help cash starved governments to come
out of their debt/trap.
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It is because of these benefits that VAT has been adopted in every region of the
world% and by so many different &inds of nations. The system was initiated first in .razil
mid #8!"s while (urope adopted the system in #9!"s. In Asia% a large number of
countries including our neighboring countries li&e China and +ri :an&a have been
following this system for a number of years. 6e too have modified our tax regime to the
VAT model and it seems that the experience so far by those states which have adopted
VAT has been very positive.
If is seen that in states where VAT has been implemented there has been a
substantial increase in the tax revenues of the government. There has been an increase
of 3!; of revenues in 3!!)/!< = )!; increase in 3!!</!$
<
in ,aryana% 5elhi has seen
3; rise in tax collection under VAT
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. +everal other states have also reported
significant increase in tax revenues after the introduction of the new system. In the years
to come% it seems% VAT may provide greater revenue to the +tate governments.
Issues that need to be addressed
The >el&ar Committee Tas& 2orce has% however% highlighted some important
issues that need to be addressed for the successful transformation to a VAT regime. To
ensure that the immediate benefits accrued so far from this system are not lost% those
issues should be examined.
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Pradeep *inodia, +ntrod!ctor" Speech F+CC+ Conference on VAT, +ss!es and Concerns , A!-!st )1,
$%%&, .ew *elhi
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Economic Times, 0 Fe1, $%%&'
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Economic Times, $% A!-, $%%&'
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reparedness for !tate VAT ? There is a manifest need for public awareness
amongst the general populace. @oint Arogramme should be underta&en by all
sta&eholders to disseminate information about VAT and its benefits.
"niformit# of definitions ? A conscious and earnest attempt needs to be made
by all state governments to ensure uniformity of all +tate legislations% procedures and
documentation relating to VAT. This would ensure greater harmonization between the
taxation regimes of different states% eliminate unhealthy competition and lead to the
integration of the domestic mar&et.
Compensation to !tates ? The issue of compensation is possibly the most
controversial and problematic point of contention in debate surrounding VAT. It must be
tac&led through mutually acceptable mechanisms.
"nification of all local taxes ? The introduction of VAT should be supplemented
by rationalization of the overall tax structure.
Credit on Inter$state transactions ? The recommendation of the tas& force that
needs to be effectively considered is the grant of credit of duty by the importing +tate for
the duty paid in the exporting +tate% in the course of inter/+tate movement of goods. The
implementation of this measure would ensure smooth inter/state trade and benefit the
economy.
!tabilit# and continuit# of the VAT regime ? Another aspect is step about the
creation of a VAT Council. The (mpowered Committee of +tate 2inance 7inisters has
done good wor& in the implementation of VAT. A permanent suitable committee should
be considered and may be vested with adeBuate powers to ta&e steps against
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discriminatory taxes and practices and eliminate barriers to free flow of trade and
commerce across the country.
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Concluding %emarks
I would conclude by hoping that critical issues in the implementation of the VAT
system would be addressed soon. 6ith this% I congratulate the +ales Tax .ar
Association% for organizing this conference. I am sure that the discussion in the coming
two days would be highly productive and enlightening for all the participants.
CCCCC
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2eport of the 3el(ar Committee Tas( Force, www'indiainfoline'com
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