ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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A Practitioner’s View

Value Added Tax Scams and Introduction of the Goods and Services Tax

In the postcolonial era, tax reforms in many developing/emerging economies resorted to indirect taxes under the presumptions of broadening the tax base and achieving horizontal equity. But, leakage in the form of evasion had challenged the attainment of these objectives, and continues doing so even after half a century of constant churning by tax architects to arrive at an optimum solution. The ease of evasion is indicative of the gap in the “lab to land” transfer of technique. From a theoretical standpoint, the goods and services tax, based on the principles of value added tax, can potentially address much of the malaise afflicting VAT in a federal polity, and may also offer the desired bridge for an informal economy to move towards the realm of formalisation in the long run.

Horizontal equity in the distribution of tax burden and broadening of the tax base form the two main purposes of indirect taxation, among other things (NCAER 2009). But, administering indirect taxes, especially determining the “point of levy” has been a tall call, almost ubiquitously. A commonly observed practice is to levy and collect the tax at a single point in the commodity value chain, such as the point of consumption. The retail sales tax (RST) in the United States (US); the ad valorem sales tax in India; or a comparable business tax in China are examples of such single point taxes. Though such a concept of single point levy is elementary both for understanding and administering, yet it has its intrinsic weaknesses too. First, due to the cascading effect of tax, the burden of taxation could be shifted disproportionately on the final consumers. Second, in many of the developing and transitional economies (DTEs), with a high concentration of informal economic activities at the consumption points, there is the potential risk of missing out tax at the final consumption point, leaving little scope to recover the same or reverse the process thereafter. The methods of tax evasion in a single point levy system have been the soft spots of tax reforms in India. Sales tax was sidestepped simply by taking the goods out of the chain right at the onset, with little chance of recovering it down the line. The additional challenge of such tampering lied in its potential of creating a parallel economy by keeping a substantial part of the value chain outside the vigil of any regulatory authority.

One way to deal with this problem was to shift to a multi-point tax regime, such as the value added tax (VAT), which could offer an all-in-one solution, particularly to DTEs where indirect tax evasion is a rampant occurrence. Apart from optimising the revenue yield, VAT was perceived to deal with various other incidental challenges such as the cascading effect of tax, rationalisation of taxing process, etc. However, after being practised for a while, VAT was alleged to exacerbate the malaise, which it was expected to address.

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Updated On : 2nd Nov, 2018
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