system of VAT work in India and type of economy in the world

1. ROLE OF VAT IN INDIAN
ECONOMIC SYSTEM

2. WHAT IS VAT?
Every commodity passes through different stages of
production and distribution before finally reaching
the consumer. Some value is added at each stage of
the production and distribution chain: for instance, a
forged metal tool is more valuable than metal, which
was itself more valuable than the ore that was
originally mined. Value Added Tax (VAT) is a tax on
this value addition at each stage.

3. What are the tax rates under VAT?
Since every state has its own VAT legislation, VAT rates, taxable base and list of
taxable goods, VAT rates will differ from state to state.
 Schedule ‘A’ – Essential Commodities (Tax-free) – Nil
 Schedule ‘B’ – Gold, Silver, Precious Stones, Pearls etc. – 1%
 Schedule ‘C’ – Declared Goods and other specified goods – 5% (Rates for items
other than declared goods changed to 5.5%)
 Schedule ‘D’ – Foreign Liquor, Country Liquor, Motor Spirits, etc. – 20% and above
 Schedule ‘E’ – All other goods (not covered by A to D) – 12.5% starting April 1,
2016.

4. Why VAT instead of General Sales Tax?
 One of the major pitfalls of the General Sales Tax (origin based Sales
Tax system) was cascading. Since there was no offset of tax paid on
purchases, the tax becomes embedded in the final cost, often several
times.
 Cascading increases the cost of production and makes the product
uncompetitive. Further, since the existing sales tax system is a tax on
sales without provision for off-set of tax paid on purchases, it
discourages ancillarisation.

5. • Under VAT system, there is not only the provision for off-set
of tax paid on raw materials, but also for capital goods.
• Input tax credits and offsets of tax paid on purchases
eliminate double taxation and cascading. This also reduces
the cost of production. VAT creates an environment where
industry can thrive and ultimately helps the economy grow.

6. History
 The OECD (2008, 112–13) cites Chanchal Kumar Sharma (2005) to answer why it has
proved so difficult to implement a federal VAT in India. The book claims that
although the implementation of a broad-based federal VAT was considered as the
most desirable consumption tax for India since the early 1990s, such a reform
would involve serious problems for the finances of regional governments.
 Also, implementing VAT in India during the current economic reforms would have
paradoxical dimensions for Indian federalism.
 On the other hand, implementing the VAT, to make India a single integrated market,
would lead to revenue losses for the states and reduce their autonomy indicating
greater centralization

7. States where VAT is applicable
Gujarat
 The Government of Gujarat had pass the "Gujarat Value Added Tax Act,
2003" (Act) in 2003 and specified that the date of implementation
(appointed date) of the same would be notified later.
Maharashtra
 The system of Value Added Tax (VAT) has been implemented, in the State
of Maharashtra, w.e.f. 1 April 2005. Every dealer, who becomes liable to
pay tax under the provisions of MVAT, shall apply electronically for
registration, within 30 days from the date of such liability.

8. Delhi
DVAT 2004 as amended by DVAT 2005 and DVAT Rules 2005 came into force w.e.f. 1
April.,2005. It repealed Delhi Sales Tax Act 1975, Delhi Sales Tax on Works Contract Act,
1999, Delhi Sales Tax on Transfer to Right to use Goods Act 2002 and Delhi Tax on Entry
of Motors Vehicles into Local Areas Act 1994.
Jammu & Kashmir
Value added tax for the state Jammu & Kashmir includes multiple products such as
cooked food, saffron, honey, electrical items, textile items such as durries, quilts,
Pashmina wool etc. Apart from the applicability of VAT, the govt also made some
exemptions on basic food items, industrial units, hotel, and farming equipment.

9. The effect of value added taxes on the Indian
Economy
 In one of the most large scale reforms of the country’s public finances in over the
past 50 years, India has finally agreed the launch of its much delayed value
added tax from 1st April, 2005 at a rate of 12.5%.
 Since, India is a developing country, the main source for revenue is generated
through tax levied on the individual on the purchase of goods or services.
 It has been identified that rural people are charged more tax than urban people
due to subsidized rate provided to them in food products, transportation,
electricity, water etc. for these facilities they are charged indirectly from their
source of income like agricultural and allied activities.

10. • In implementing VAT, the biggest benefit perhaps is that it could unite India into a
large common market. This will lead to better business policy as each producer will
have a big common market before him.
• VAT would change the nature of trade in the coming years, but the medium level of
traders that is C&F agents, distributors, stockiest etc. would face problems as the
companies would reduce the tier of marketing.
• Similarly small retail dealers would be required to maintain more accounts or pay
composition money which cannot be collected from the customers. The present
provision of CST and VAT cannot go together.
• After the abolition of CST the direct marketing concept may gain ground and the
necessity of having warehouse and godowns in all states may decrease or come to an
end. It would adversely affect the trade and employment of the states. America which
has similar federal and state laws Constitution has not implemented VAT.

11. C0NCEPT OF ECONOMY
 An economy may be defined as the sum-total of institutions and patterns
of behaviour that organise economic activity in a society.
 It consists of a group of economic institutions through the operation of
which the various resources – scarce relative to the needs of them – are
utilised to satisfy human wants. Such a system is not the same in all
countries, nor does it remain the same in a country at all times.

12. At present, the following broad types
of economy are found in the world:
(a) Capitalism,
(b) Socialism, and
(d) Mixed economy.

13. Nature of Economic System
 Every economic system has its own rules and regulations regarding production,
distribution or exchange.
 These rules are not the same everywhere thus, capitalism or free enterprise
economy is based on the doctrine of private property and freedom of business.
 But socialism, on the other hand is based on socialisation of the means of
production and the organisation of production for social gains.
 In spite of their differences, like the living organism, the economic systems have
their birth, progress and decay. With the change in time, each system undergoes
various changes. Consequently the basic features of the economic system do not
always remain the same.

14. Main functions of the economic system
 To bring about a balance between supply and effective demand for goods and
services in an optimal manner as far as possible.
 To determine what goods and services are to be produced and in what quantities
(food-grains or defence goods, fertiliser or clothing.
 To allocate scarce resources among the industries producing goods and services
 To determine the best possible productive methods for the full utilisation of the
resources of the society
 To distribute the products of agriculture and industry among members of the
community

15. Capitalism
 Capitalism is defined as a system of production whereby business owners
(capitalists) produce goods for sale in order to make a profit and not for personal
consumption.
 In capitalism, capitalists own the business including the tools used for
production as well as the finished product.
 Capitalist production relies on the market for the allocation and distribution of
the goods that are produced for sale.
 The United States and much of the developed world today can be described as
capitalist market economies.

16.  Socialism is a system of production whereby workers collectively
own the business, the tools of production, the finished product, and
share the profits – instead of having business owners who retain
private ownership of all of the business and simply hire workers in
return for wages.
 Socialist production often does produce for profits and utilizes the
market to distribute goods and services. In the China, worker co-ops
are an example of socialist production organized under a broader
capitalist system.

17.  Communism is a system of production where private
property ceases to exist and the people of a society
collectively own the tools of production.
 Communism does not use a market system, but instead
relies on a central planner who organizes production
(tells people who will work in what job) and distributes
goods and services to consumers based on need.
Sometimes this is called a command economy.

18.  A mixed economic system is a system that combines aspects of
both capitalism and socialism.
 A mixed economic system protects private property and allows a level of
economic freedom in the use of capital, but also allows for governments to
interfere in economic activities in order to achieve social aims.
 According to neoclassical theory, mixed economies are less efficient than pure
free markets, but proponents of government interventions argue that the base
conditions required for efficiency in free markets, such as equal information and
rational market participants, cannot be achieved in practical application.

19. What my thoughts in this?
 Economic systems are grouped into traditional, command, market, and mixed
systems. Traditional systems focus on the basics of goods, services, and work,
and they are influenced by traditions and beliefs.
 A centralized authority influences command systems, while a market system is
under the control of forces of demand and supply. Lastly, mixed economies are a
combination of command and market systems.
 So, a balance of capitalist and socialist economy, i.e. mixed economy is most
realistic economy to be implemented. But the most important question is what
will be the best ideal proportion of the two economy is to be considered.

20. Economic Planning
 Economic planning is the process through which we can take the
decisions of what and how it is to be produced through controlling and
managing the economic activity.
 It is an economic programme speculated for the development of the
regional economic system.
“Economic Planning is essentially a way of organizing and utilizing
resources to maximum advantage in terms of social ends.”

21. Elements of Economic Planning
 A system of Economic Organization
In this first features of economic planning, it consists of various comprehensive activities of
production, consumption, distribution, exchange, and finance are planned and defined in a coordinated
manner to attain various economic and social objectives.
 Determination of Target and Priorities
In this, the economic and social targets are well defined in the process of economic planning. A
certain priority is also determined for these targets.
 Central Planning
All the activities of economic planning are performed by the central planning authority. This authority
is known as the planning commission. All the decision are taken by this authority.

22. • Certain Period
The process of economic planning involves the determination of economic plans for a
certain or specific period. For Example– In India, an economic plan is purposed for 5 years.
After completing one five year plan another plan is launched.
• Government Regulation and Control
Economic planning is a government affair. All plans are determined, regulated, and
controlled by the government (generally central government). All the major source of data
(related to economy planning) is managed by the government and its team.
• Economic and Social Government
The main motive of economic planning is economic development and social welfare. All
possible efforts are made to achieve balanced growth.

24. Objectives of Economic Planning
 The 3 main objectives of economic planning are
classified as follows:-
 Economic Objectives
 Social Objectives
 Political Objectives

25.  Economic planning help in mobilizing and allocating the
resources in desired manner.
 Objective of economic planning is to reduce inequality,
economic growth, balanced regional growth, modernization.
 Each five year plan aims to achieving certain target.
 Five year plan constitute the steps toward the fulfillment of
objectives of economic planning.