Value Added Tax

Unit IV

Value Added Tax

MANVAT (VAT at the Manufacturing Level) Government of India set up Indirect Taxes Enquiry Committee (1976) : Chairman Shri.L.K.Jha MODVAT (Modified VAT) introduced with effect from May 1, 1986 Initially it covered selected items in only 37 chapters, gradually extended to 77 chapters MODVAT renamed as CENVAT (Central VAT) from April 1, 2000 State level VAT is being introduced in most States from April 1, 2005

Concept
Most progressive taxation systems Important point : Potential to reduce prices Multi-point levy : Levied at each stage of production based on value addition Manufacturer pays tax on raw materials and add value using them Value addition includes manufacturing, processing and packing Tax on the finished product is arrived at after deducting the tax paid on the raw material It culminates with customer paying minimum VAT

Objectives of VAT
Eliminates multiplicity of taxes Prevents double taxation Eliminates inter-state tax Rationalizes over all tax burden in process of goods & services until sold for consumption Replaces inspection of the system with built in assessment by the dealers and internal auditing Improves tax compliance

Advantages of VAT
Encourages widening of tax base Reduction in rates of tax If properly designed it does not distort trade and production methods Encourages better compliance; Less evasion Improves economic efficiency Improves export competitiveness Record keeping and administration is easier

Draw backs
In India only 1/3rd of the industry is in organized sector Requires elaborate book-keeping procedures in small business units