a tr t re in ndia 17.5
prices of goods it does not increase inflation— (iii) With the process of economic reforms,
and is therefore highly suitable for an economy India moved towards the market economy.
like India where due to high level of poverty large And for this, firstly India needed to have a
number of people lack the market level purchasing single market. Without uniformity at the
capacity. It is a pro-poor tax system without being state level taxes (uniform VAT) this was
anti-rich because rich people do not suffer either. not possible.
(iv) Indian federal design has resulted in
neeD of vAt in inDiA economically weaker states and stronger
Over 160 nations in the world have implemented centre. As VAT increases the total tax
the VAT system of taxation regarding collecting collection (experience of the world
their indirect taxes. There have been valid reasons suggests so) it was fit to be implemented
why India should move towards the VAT method at the state level.
of tax collection. We may see some of the major (v) India has been a country of high level tax
reasons:13 evasion. By implementing VAT method
(i) Due to single point tax collection, Indian of indirect tax collection, it becomes
indirect tax collection system was price- almost impossible to go for large scale
increasing (having cascading effect on the tax evasion. To prove one’s level of value
price) which was highly detrimental to addition, the purchase invoice/receipt is
the poor masses. Implementation of VAT a must which ultimately makes it cross-
will improve the purchasing capacity and check the level of production and sale in
so living standard of the poor people.14 the economy.15
(vi) If some of the state level taxes (which
(ii) India is having a federal political system
are many) are converted into state VAT
where side by side the central government,
the complexity of taxation will also be
states have also been given power to
minimised. And at the end, it is possible
impose taxes and collect them. At the
to merge some of the centre’s indirect
central level, there had been uniformity
taxes with it, i.e., arrival of the single
of taxes for the economy. But there was
VAT.
no ‘uniformity’ at the state level taxes
(i.e., state excise, sales tax, entertainment Keeping all such things in mind, India
tax, etc.). This was detrimental to the started tax reform (Chelliah Committee and
Kelkar Committee) and a certain level of sucess has
development of a single market for Indian
been achieved in this area which can boost our
economy as a whole. India basically had
motivation.
many markets, but no Indian market as
such. To bring in uniformity at the state- In the year 1996, the central government
level taxes, VAT was a necessary step in started collecting its excise duty on the VAT
India. method and the tax was given a new name—the
CENVAT.
13. Derived from the points forwarded by the GoI and the The next proposal was to merge the states excise
Empowered Group of State Ministers.
duty (imposed on intoxicants only) and their sales
14. Raja C. Chelliah, Pawan K. Aggarwal, Mahesh C.
Purohit and R. Kavita Rao, Introduction to Value taxes into one tax—the state VAT or VAT. This
Added Tax , in Amaresh Bagchi (ed.). Readings in could not take place due to states’ lack of political
Public Finance (New Delhi: Oxford University Press,
2005), pp. 277–78. 15. Ibid.