India has at last joined the bandwagon of countries that have adopted VAT. World statistics reveal that VAT is currently being implemented in 135 countries covering approximately 70% of the world population and generating over 27% of the total tax revenues in those countries. The rapid global spread of VAT, more particularly in the developing countries, can be attributed to its success in the European Union and the persistent support and advocacy of the Fiscal Affairs Department of IMF.
The genesis of VAT in India dates back to 1993, when Dr. Manmohan Singh, then the Finance Minister, in his budget speech spoke in its favor, announcing its introduction as vital to the liberalization process. In 1994, the Government of India appointed a study group to recommend measures to `harmonize and rationalize' the domestic trade tax system in the country. On the recommendations of this study group, the Government of India appointed a State Finance Ministers' Committee, which recommended a gradual switch over to the VAT system. At the onset, the state governments, fearing that VAT would undermine their fiscal authority, did not entertain it. Almost after a decade later and five bogus attempts since 2001, the recommendation voiced by this Committee has now become a reality. This could be partly attributed to the finalization of the VAT design by the Empowered Committee of State Finance Ministers on VAT after lengthy deliberations and consensus, taking into account the concerns of all stakeholders and the promise of the central government to the state governments to compensate losses in the form of `Special Grant-in-Aid' full compensation in the first year, 75% in the second year and 50% in the third year.
The rationale behind the implementation of VAT is to tax only the value added component in an economic activity. The pre-VAT regime of taxing a product on its full value, every time it changed hands, resulted in compounding of taxes, further complicating the already complicated multi-state tax system. This ultimately resulted in a snowball increase in the burden of the ultimate customer and made the manufacturing sector uncompetitive. Further, woes included multiple taxes such as turnover tax, surcharge on sales tax and additional surcharge, etc. In India, the fiscal barriers between states (multi-state tax system) hinder the free flow of goods and services. A comprehensive VAT structure was the only solution to such a complex sales tax system. Combined with a system of tax credit, the new VAT is aimed at eliminating the cascading (tax on tax) effect. In addition to increased transparency, compliance, revenue, and decreased tax evasion, the ultimate beneficiary is believed to be `The Consumer - The King'.
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