How reforms in existing VAT system can boost the growth of businesses

Value-added taxation in India was introduced on 1st April, 2005 at State level. It is said that VAT is a better system that sales tax on the grounds of efficiency. In this article we will see how VAT is determined in various States of India and what reforms can be brought in the VAT regime in order to increase the growth rate in Indian businesses.

VAT reforms in India

According to a survey, most of the states in India have replaced their State level sales taxes with a simplified and progressive tax called the VAT. The VAT is been collected by the State Government.

The government of India started a tax reform committee under Prof Raja Chelliah who bought about reforms in the current tax system. Following are the reforms that were introduced in this committee:

  1. There was a reduction bought about in the corporate tax rates.
  2. The committee aimed at simplifying the structure of excise duty and integrating them with VAT (value added tax).
  3. Services were also then included in the VAT net.
  4. Improved the quality of tax administration.

India is currently operating on one of the most complex and inefficient consumption tax regimes worldwide. Indian Governments various taxes which include: Indian VAT which is levied on goods separately, Indian Service Tax is levied on various services being provides, CENVAT which is a kind of VAT charged by the Central government on the supply of goods and lastly Professional tax that is to be paid by professional workers.

These taxes usually overlap and result in double taxation eventually increasing the tax burden on the person liable to pay taxes. And we all know that there is a limited scope of the recovery of VAT which at last results in spiralling compound tax. 


Following are the recommendations for the existing VAT regime in order to increase the growth rate of Indian businesses:


  1. It is to be noted that so many different taxes lay burden on the tax payer and in order to ease the tax payment government should find ways to replace the excise tax, sales tax, etc, and introduce a single tax. A person will surely be able to pay one single tax without confusion and burden. People generally evade taxes just because they think that paying so many different taxes is a mere burden. Therefore, governments must levy one single tax so that people stop evading tax payments.
  2. There are unduly high rates being charged on some commodities which make it difficult for people to afford paying taxes. It is seen that expenses are increasing at an alarming rate and prices of goods and services are also touching the sky. Managing all the expenses and payment of higher tax rates makes it difficult for the tax payer. It is recommended for the governments to levy relatively lower rates on certain goods and services.
  3. The procedures that are to be followed by all the tax payers must be updated and simplified with time. New technologies can be adopted like online payment of taxes in order to save time and efforts of the tax payers. Updated and simplified means of collecting taxes will somehow result in more tax payments than evasion of taxes.
  4. People are certainly evading a tax which is against the laws; therefore, it is recommendable for the governments to strengthen the monitoring and inspection mechanism in order to keep a check on the people who do not pay taxes.
  5. In order to prevent evasion of taxes, Delhi Government has gone online. A new online form has been introduced (Delhi Sugam-2 (DS2)) with effect of September 15. Earlier the form which was introduced was T-2 form. Now T-2 is replaced by DS2 form. This is a simple form which is to be filed in a non interactive mode through the source of SMS or online system.

VAT has different rules than general sales tax laws. The VAT rate is different for all the goods also VAT rate differs from State to State. The entrepreneurs understand that it is essential for them to be conversant in accordance to the regulations of different States for setting the VAT rates. VAT and Sales tax are considered as indirect taxes. The most popular instrument that is used by the Government in developing countries like India is increasing the indirect taxes in order to increase the revenue.

If the government takes correct actions on time, it will be easy for the governments to receive the tax amount and also for the tax payers, as the burden of paying tax will be reduced. Taxes are being used for the overall growth of the country so it is our responsibility to stop evading taxes and contribute towards the development of our nation.

Visit Taxmantra – Business Maintenance page for any query, feedback or support.


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