Doubts over efficacy of VAT *



Case Code : CLIBE055
Publication date : 2005
Subject : Business Environment
Length : 06 Pages


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Abstract: ICMR India ICMR India ICMR India ICMR India RSS Feed

The caselet focuses on the Value Added Tax (VAT) system and its introduction in India. It shows how VAT is implemented in different countries. It also discusses the stand of traders and state governments in India on the implementation of VAT and how the finance ministry managed to bring about a consensus among the states to implement VAT.


Issues related to the introduction of Value Added Tax (VAT) system in India.
The replacement of the Central Sales Tax.
Concerns of traders and the state governments with regard to implementation of VAT.


On January 17, 2004, the finance minister, P. Chidambaram, formally released a "White Paper" on Value Added Tax (VAT), which suggested a uniform state-level tax on over 500 items.

All states in India, except Uttar Pradesh, agreed to introduce the long deferred VAT from April 1, 2005. Under the two-tier tax system, about 530 items were identified for VAT.

Out of the 530 items, 250 such as drugs and medicines and industrial products would attract only 4% tax and the remaining items, except gold and bullion, would attract 12.5 per cent. Gold and bullion would attract 1 percent each. It is levied in lieu of indirect taxes such...

Questions for Discussion:

1. What is VAT? Do you think India really needs the VAT system of taxation? Explain.
2. What are the limitations of VAT? Why are traders opposing the introduction of VAT?

Key words:
Value Added Tax (VAT), uniform state-level tax, indirect taxes, Indirect Taxation Enquiry Committee, Modified Value Added Tax (MODVAT), Cenvat (Central Value Added Tax), Indian Constitution, Central Sales Tax (CST), empowered committee of state finance ministers, multiple tax regime

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