VAT Case Study

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VAT has direct as well as indirect effects on several economic variables. The effects of VAT felt all over the economy because this tax influences several macro economic variables such as savings, investment, employment, distribution, prices and efficiency of resources. VAT directly affects some of these variables whereas the effect on other is indirect. One of the most important effects is economic growth which is directly linked to revenue efficiency of VAT (Purohit, 2001). Revenue efficiency aspect of VAT is a debatable issue and experiences vary from country to country and region to region. Provision of set-off leads revenue losses and these vary from 20 to 40 percent in different countries. Revenue losses are recouped through base expansion, higher standard rate, by checking tax evasion or through better tax compliance due to attributes of simplicity and provisions of cross –checking. Due to uncertain behavior of these parameters in different countries, VAT is introduced with the assumption of revenue neutrality. Revenue productivity of VAT may not …show more content…

During the period 1980-81 to 1996-97 buoyancy co-efficient of sales tax in different States was more than 1 in majority of the States with all India average of 1.02(Purohit, 2001). Sales tax buoyancy with respect to GSDP at factor cost for all States taken together for 1993-94 to 2004-05 was 1.053 (RBI, 2005). The buoyancy of sales tax revenue has been generally, higher as compared to those of other State taxes as well as of excise or custom duties levied by the Central government. The crucial issue for the State finance is that the revenue efficiency of State VATs, at least, remains the same as compared to the taxes like GST and CST it will replace (Das,

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