Value Added Tax (VAT) - A More Disciplinary Approach in the Emerging Scenario

Under the value added system - a non-cumulative multistage tax is levied on the net value i.e. tax on gross output minus tax on the cost of all materials used. Whereas, in a cumulative multistage system, the tax liability accrues at each stage in the course of production and distribution. In this situation, it is never possible to know how much sales tax is paid on a product at each given point in the productions or distribution process. It depends entirely on how many stages the product itself, its components and the equipment and services utilized have passed through. Even in a single industrial sector these can vary considerably from product to product. At each taxable point, the tax paid accumulates on top of the tax levied at earlier stages resulting in cascading effect which leads to vertical integrations. Consequently, the cascade systems as in the case of sales tax are not economically neutral. It can distort competition in domestic as well as international trade. Of course, this necessitates maintenance of proper records which our trade and industry detest for obvious reasons.