Educate on Vat

Updated: Mar 8 2005, 05:30am hrs
The recent rumbling from the states threa-tening to withdraw from the Vat regime is worrisome. Although there has been considerable deliberation on the design of Vat, inadequate attention has been paid on the information campaign on Vat.

Much of the resistance is owing to misconceptions about Vat. We have to educate the taxpayers, Vat paying manufacturers, dealers and traders, that Vat is the best form of taxation, as it is simple, transparent and neutral to economic decisions of agents.

Cross-country experience of Vat should be highlighted to show the benefits for trade and industry.

It also needs to be highlighted that Vat encourages self-assessment by dealers. In other words, this means less interference by the tax official, which, in turn, means less harassment, owing to a rapid decline in the inspection raj.

Another issue where there has been significant apprehension is the mindset of dealers, that they would not get refund of purchase tax under Vat. It should be noted that it is not an issue of refund. Rather, it is the tax credit that will be adjusted against the total Vat liability.

This will translate into a lower liability of Vat-registered dealers.

Finally, it should always be emphasised that Vat is not imposed to collect higher tax revenues by the government. Rather, it will usher in an era devoid of distortionary taxes.

Importantly, the incidence of tax will be much lower under the Vat regime, compared to the current sales tax system. Also, this system of taxation is not inflationary, a fact borne out by empirical studies carried out across the globe.

The writer is senior economist, National Institute of Public Finance and Policy (NIPFP)