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School of Law
Five Year Integrated B.A.,/B.B.A.,/B.Com.,LL.B. (Hons.)

Principales Of Taxation

An evaluation of role of value added tax as source of income in India

Course Instructor Name: Manal Naseem

Prof. Sakshi Pandey ID No : 20181BAL0028
Submission Date : 30/11/21
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Abstract

Value Added Tax is a type of indirect tax. An indirect tax is said to of impersonal nature. These
taxes are imposed on good and services. An indirect tax can be divided into two categories goods
which have taxes like exercise duty, custom duty, VAT, CST and services which has service tax.
Sometimes, when the government operates on a budget surplus or wants to increase its revenue in
order to finance its budget deficit, the question that arises is that is VAT a boon or a curse for a
developing country like India. Around 115 countries and territories in the world have recognized
and implemented VAT system. After a lot of conflict and dispute India agreed the launch of its
much delayed VAT from 1sr April 2005 at a rate of 12.5%. All the State level finance minister in
new Delhi designed to make accounting more transparent have helped in to cut short trade barriers
and boost tax revenues. According to Chanakya, “A government should tax its people like a
shepherd shears a flock or a bee gets nectar from a flower”.

It is important to understand the taxes are levied not only on products but also services and this
becomes a source of revenue for the government that help them plan and execute development
activities in the country. Since, India is a developing country, the main source for revenue is
generated through tax levied on the individual on the purchase of goods or services, this revenue
generated is used for fulfilling the infrastructural, technological, entrepreneurial demand of the
country. But the question is Whether the imposition of high tax on the society is favorable or
unfavorable in the present scenario to meet the technological and infrastructural demand?

A research show how people from rural area are charged more taxes than that of urban area, these
happen because they are provided with subsidies in food products and water and electricity etc.
and so for these facilities they are charged indirectly form their source of income like agriculture
and activities related to it.The question that arises is: do value added taxes promote prosperity and
wellbeing for the common men? VAT is omnipresent in all goods and services provided to the
consumer.

The paper aims at presenting the importance of value added tax in the Indian society, its impact
and the future prospect for product and service industry in India.
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Introduction

VAT was first introduced in 1954 in France and later its scope was expanded to include services
in 1978, agriculture in 1983 thus resulting in VAT becoming one of the most important accounting
innovation. Maurice Maure, a French Economist and the joint director of the French tax authority
was the person behind the introduction of VAT. VAT can be understood as the value that a
producer on any stage of production adds to his raw materials or purchases before selling the new
or improved products to the user.

The concept of tax was first proposed by Dr. Wilhelm Von Siemens from Germany in 1919. the
major sources of tax revenue to the central government constitute income tax, excise duty and
customs duty whereas the state government substantially depends on sale tax as the main source
of revenue. Taxes are implemented on all products such as food and beverages, medicines,
transportation, telecommunications, amusement parks, cinema halls, properties owned etc.

After the implementation of VAT in France soon other countries also adopted this method of
taxation all over Europe and Asia. From raw material to final product at every stage value is added
to goods and services. VAT in India was adopted in 2005. The Indian economy is moving towards
simplified and transparent system of indirect taxes by introducing goods and services tax in near
future.1

Definition

Value added tax imposed and collected from the seller in the course of trade or business on every
sale of properties be it real or personal lease of goods or properties real or personal or vendors of
services.it is an indirect tax, thus, it can be passed on the buyer.

VAT is a form of consumption tax, as buyer, VAT is a tax on purchase and as seller VAT ia a tax
only on the value added to product or services sold.

VAT is a simplified tax administration fostering honesty and higher government revenue helping
in the national progress

1
https://www.taxpolicycenter.org
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By simplified tax administration means the vat system promotes efficient and simplified tax
administration. It also curves the tax evasion and fraud.

The Vat system encourages the issuance of receipt which is necessary to accumulate input tax
credits what will minimize output tax liability.2

Objectives

Before any goods reaches the consumer it passes through manufacturer, wholesaler, retailer and
so on. Therefore, the sales tax on the product is passes on the person next in chain, making the
customer (buyer in general) to bare the tax of manufacturer, wholesaler, retailer etc. thus the VAT
comes into place and separating the sales price and sales tax, so the consumer is not required to
pay cascading tax or double tax. VAT avoids shifting of tax burden. It levied taxes only on value
added hence it’s called value added tax. VAT combined with service tax becomes GST.3

The primary objective is in the forefront of the evolution of VAT, the State must ensure that
barriers to inter-state trade should be eliminated in order to create a unified national market. The
approach and structure of VAT process must be transparent, simple and consistent.

What type of tax system India needs?

A good taxation system is very important in development of its country as it generates funds which
are used in welfare of people living in the said country. But the question is what is a good taxation
system?

In my opinion A good tax system should look at entire range of taxes a taxpayer is subject to in
other words fairness and this fairness will come by. Horizontal equity where people with equal
capacity to pay same tax and Vertical equity where people with greater capacity to pay more tax

The next thing a good tax system must have is Efficiency i.e. increasing the overall productivity
of economy. It is the potential to affect or interfere the efficiency of the economy. It affects the

2
https://www.business-standard.com
3
https://www.economicsdiscussion.net/government/taxation/taxation-objectives-top-6-objectives-of-taxation-
discussed/17450
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economic decision, either encouraging or discouraging them to save, spend, invest etc. best
example is taxes on pollution or smoking, increase income as well as serve social purpose. This is
known as “double dividend” of a tax.

Administrative simplicity means tax system should be simple and people should understand how
and where thy have to give the taxes, this includes factors like tax computation, filing, collection
etc. checks tax evasion. India needs tax simplification as recommended by chelliah committee.

Flexibility is scope of desirable modification, change with changing economy. Meaning if there
are any changes in economy, the government should be able to make desirable change in taxation
system also.

Transparency is actual tax paid and the services getting against it. Means there should be
transparency as to how much tax is collected by government and what and where is it used for.

Importance of VAT

No cascading effect of tax collected meaning a person will not pay tax on the amount he once had
already paid for, if there is cascading effect in tax the prices of goods will increase leading to
inflation, thus VAT help in decreasing inflation. VAT is a Pro poor tax system without being anti
rich, as the final price of product is lot cheaper than that of the one where VAT was not followed.
Studies shows that VAT has caused Increase in tax collected as well.4

Need of VAT in India

India is still a developing country with majority of its population still being in middle or lower
middle class, Single point tax collection was having cascading effect and thus anti poor, as the
VAT was introduced in Indian the problem of cascading effect or double taxation was solved.
Drastically decrease in prices of good were seen and shifting of burden from manufactures all the
way to consumer was solved.

4
M.M Sury, Tax System in India: Evolution and Present Structure (2015)
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Federal political system of India allows that states to impose and collect tax, so there was no
uniformity at state level taxes detrimental to single market for Indian economy. Economic reforms
in 1991 implementation needed single Indian market5. Therefore, VAT made taxation more simple
transparent and uniform. VAT doesn’t just benefit consumer but also government as VAT
implementation increases total tax collection. VAT leads to more transparency and less tax
evasion. VAT System reduces complexity in taxation system by merging several indirect taxes
into onto one single VAT. 6(Recommended by cheliah committee and kelkar committee)

CENVAT

In India the central government imposed Excise duty on the VAT. Central government can collect
CENVAT according to the central excise and custom act definition. Only states sales taxes were
converted into vat and not the excise duty (which is imposed on intoxicants only)7

Implementation Experience of VAT

In Indian though there were some complications and disputes between central and state
government the concept of VAT system was very encouraging and well received by all
stakeholders. Soon after its implementation tax revenue registered an increase. As the states were
afraid to get low tax collection due to VAT they asked for compensation from center but later only
few state claimed VAT compensation from center

Effects on the Indian society

Since liberation one of the most important component of tax reform is introduction of VAT. This
multidimensional taxation system was imposed on products going through the supply chain in each
stage. After independence Indian tried its best the eradicate the extreme poverty that has effected
the transaction in supply chain and the economy as a whole.

5
https://www.gktoday.in
6
Mohd Aqib Aslam, Implementation of Value Added Tax In India
7
https://www.bankbazaar.com
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The aim was to bring Indian from a developing to a developed country, for development of the
country the government needed funds to invest in welfare of society, form there these finds were
collected in the name of direct and indirect taxes. In india taxes like income, corporation and wealth
taxes come under direct tax whereas, sales exercise and custom tax comes under indirect tax.
Therefore, people who were not liable to pay direct taxes due to their low income had to pay
indirect taxes without knowing how much taxes there are still liable to pay indirectly. The idea
was to collect taxes from every state of the supply chain on value added to product so the tax that
government get can be used for social development.

The amount on which the tax is charged differ from one area to another as per policy. Its seen in
many places like mall or a international services like food or fashion chain that charge hefty money
from public as per govt. order. The medium and lower class people that are not aware of these
accounting techniques face difficulties in the ascertainment of rates for a good or service.

In order to maintain a better VAT system in India, it is necessary to maintain a dual process of
maintaining invoices, bills by the seller and the purchaser. "VAT is already levied differentially
on food and drink; more VAT is charged to drink coffee on the premises than to take it away",
writes Sheron, an adviser to the Commons health select committee's inquiry into alcohol earlier
this year. "If this policy was applied to alcohol but was reversed – say, for example, reducing the
VAT for on-sales from 20 to 12% – it would be possible to increase the rate of duty to compensate
for this without increasing the price of alcohol in pubs."

In Indian there is decentralization of power meaning, the tax is divided between central and state.
In indirect tax system of India, the central government has the authority to impose excise duties
on production or manufacture while the states are assigned the power to levy sales tax. The state
govt. charges public in various other products and services like that of electricity duty or
entertainment tax etc, high prices are charged on products and services like air fares, internation
food chains, petrol, etc. It is affecting people in a positive way leading to contribution for nation
and humanity.

When a producer adds some value to the product like his raw materials, or purchases before selling
the new or improved product or service is said to be value added. This is the inputs like raw
material, rent, transport, wages, after incurring all of this some profit is made by the producer.
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VAT is nothing but the tax imposed on value addition of the goods in chain of transaction from
manufacturer to retail.

In Latin, ad valorem means according to the value a full-fledged VAT in essence an ad valorem
tax on domestic final consumption levied at all stages between producer and consumer.

At each stage tax is only confined to VAT, meaning the tax will not be on total value but only on
the value added by producer before selling. Therefore, the next in the chain should not pay tax on
the gross value but only the net value, the gross value minus the value of input. It is a multi-stage
tax is being collected in instalment. Therefore, VAT may be called as modified multipoint sales
tax.

VAT is given importance in countries like India because it has Simple tax structure and is more
transparency in nature. VAT helps in neutrality of tax with respect to behavior of consumer as well
as producer. Also there is transparency of tax amount in cost of goods and zero rating of tax on
exports are easily identifiable. Ability to provide same revenue to the Government with lower rates
of tax.

Over the last few years, many attempts have been made to implement value added tax in India.
Initially, all states were to move to value added tax system by 2000, but administrative problems
and concern over the revenue implications of the change delayed the scheduled implementation.
It has been postponed many times in the five years and was finally applicable in 2005.8

Disadvantages of VAT.

Like everything VAT also has its own pros and cons. There can be such circumstances where the
VAT is collected by the dealer, but not paid back to the government, therefore the set off of such
VAT paid by the purchaser may not be allowed to the purchasers. A mechanism has to be devised
to tackle such situation.

8
Ravindra Tripathi & A.SINHA & S.Agarwal: The Effect of Value Added Taxes On the Indian Society.
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A situation of refund would arise if no VAT is payable on the final sale. As a result, the set off
cannot be availed. In such cases, the tax paid becomes the cost or the same has to be claimed as
refund. Hence, the mechanism of refund has to be framed.

VAT would also contain multiple rates of tax due to multiple types of items

In countries such as India where in there exist sales taxes already covering a wide range of
commodities, replacement of those taxes by a revenue-neutral value added tax should lead to no
inflation consequences

The dealer will now be required to maintain up to date records of purchase and sales in order to
claim set off. Many small deals maintain only primitive accounts, which were accepted by the
department.

Since central sales tax act continues to remaining force, there can be conflict between VAT and
CST.9

Threats Under VAT that is recognized as per Indian Perspective

Indian is one of those countries where the rich get richer and poor get poorer. Indian consumer is
more burdened with shortage of money and price inflation. Among the most suffering are the poor
whose purchasing power is law and they try to earn a standard life at once blood and sweat. Due
to urbanization the concept to small working families has emerged in the cities, town and even in
villages, here the individuals works not just to support themselves but also their families. Special
in ruler areas men move to cities to find work whereas women looked after the household activities.
In a situation like this the imposition of heavy taxes should either be feasible or the tax rates should
be subsidized to avoid criminal activities like murder, theft or fraud or crime like embezzlement
in the society. Not just consumers but also the intermediaries involved in the supply chain are hit
hard by VAT charges, from producer to retailers have to pay taxes to the government and meet the
accounting and legal standards to present a fair picture of their businesses.

9
http://www.astralconsultants.com/pdf/VALUE%20ADDED%20TAX.pdf
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VAT can sometimes cause threats from the consumer’s end like Incorrect usage of non-VAT
memos or many times use of fake bills to counter purchases made from unregistered dealers or
dealers or Adjustment of inter-state with purchases made local, whereas from the seller’s end
problems like Unauthentic bills, or Classification of goods for applicability of special additional
tax or Classification of goods to identify or sometimes Underpricing of goods sold.

Most of the times it’s not the rich who suffers but it’s always the majority who like poor getting
buried in the burden of taxes Issues concerning the effects of VAT. The consequences of adopting
VAT or any tax change have effects on inflation, income distribution, resource allocation,
economic growth and nations balance of payment depends upon the specific forms of tax and the
accompanying circumstances. Many believe tax to be a regressive tax. The objective is to
encourage the economy’s potential for and achieve economic growth. VAT as a direct tax tends to
increase the nations exports than imports. The VAT is also considered advantageous to the balance
of trades.10

Conclusion

Its positive to say that VAT would change the nature of trade in the coming years, thought there is
a probability that medium level of trade would face problems as it is seen that the companies are
reducing the tire of market. Also small retail dealers would have to maintain more accounts or pay
composition money which can’t not be collected from customers. The provision of VAT and sales
tax cannot go together. VAT in India has modified variants over past 20 years, however VAT is
still now not introduced in India in its original form at both central and state level. After going to
both criticism and praise by the society and have its own positive and negative impact on
consumer, VAT has become real goal maker by the Indian government in coming years. It fosters
growth and prosperity in the society. . The change in the standard of livings has increased the
purchasing power of the high class society but the medium and the poor class society has to work
hard in order to achieve their living and meet extravagances

10
Khan, Mohd. Azam; Shadab, Nagma (2013) : Impact of Value-Added Tax (VAT) revenue in major states of India,
Romanian Journal of Fiscal Policy (RJFP), ISSN 2069-0983, Editura ASE, Bucharest, Vol. 4, Iss. 1, pp. 27-46
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