ADDRESS ON
                               VALUE ADDED TAX

                                                                   Y.K. Sabharwal,
                                                              Chief Justice of India


       It gives me immense pleasure to address this All India Conference on the subject

of Value Added Tax. The era of liberalization that was ushed in the early 90‟s through

the introduction of economic reforms is perhaps the most significant event in the

economic history of India. In the last 15 years, we have taken giant strides in intergrating

our economy with the New International Economic order. The unification of our markets

with the international markets has created tremendous opportunities for Indian industry

and paid rich economic dividends to the nation. Today, there seems no dispute that India

will soon emerge as a major international econmic power and join the league of the

world‟s most developed nations. It does seem that the introduction of VAT would have

positive ramifications for our economic growth and national development. The success

of VAT is well recognized from the fact that more than 130 countries around the world

follow this system. Until recently, it was only the United States and India amongst the

more populous countries that did not follow VAT. However, this has now changed and

India has reformed its tax regime.

       Right at the outset, however, we must note that for the successful

implementation of VAT, it is important that there be constant dialogue between all the

stakeholders regarding issues related to VAT and its implementation. This includes legal

and tax professionals, companies, traders, consumers and the State governments. I am

confident, that forums such as this would go a long a way in generating that dialogue. In

this regard, we must commend the efforts of the Sales Tax Bar Association, its office-

bearers and members for taking such an initiative.

The VAT Model

          The VAT regime being implemented in India is based on the fundamental norm

of “set-off” for the tax paid earlier through the input tax credit mechanism. In the existing

sales tax structure, there are problems of double taxation of commodities and multiplicity

of taxes, resulting in a cascading tax burden.1 For instance, under the original system,

before a commodity is produced, inputs are first taxed, and then after the commodity is

produced with input tax load, output is taxed again. This causes double taxation. Under

the VAT regime, however, a set-off is given for input tax as well as tax paid on previous

purchases. Entities engaged in the manufacturing and trading of goods are able to claim

tax credit on the materials and services that they buy to make further supplies or

services directly or indirectly sold to end-users.2 This prevents the „cascading effect of

taxes‟ on the production and distribution processes of goods and services and

encourage economic growth. In essence, this prevents overall distortions in the taxation


The impact of VAT on the Integration of the Domestic Market

          However, it is essential that we ensure that regional disparities do not distort the

benefits of this economic boom. To ensure regional parity in national development, there

is need for intergrating domestic markets to ensure smooth inter-state trade and

commerce. In this context, the introduction of the state level VAT system is a laudable

change in the indirect taxation system as it leads to harmonization of state taxation

regimes across the board. As experiences in the European Union have shown, the

    White Paper on State Level VAT, Empowered Committee of State Finance Ministers, January 17, 2005.

harmonization of the taxation system through intiatives like VAT is a crucial step in the

unification of domestic markets. I am confident that even in India, VAT will play an

important role in the intergration of the domestic market and boost inter-state trade and


VAT Leads To Better Tax Administration and Compliance

       The VAT design will significantly bring in simplicity and transparency in the tax

structure, thereby improving tax-compliance and eventually boosting the revenue growth

of state governments. The hallmark of the VAT system is that VAT liability will be self-

assessed by the dealers themselves in terms of submission of returns upon setting off

the tax credit. The existing system of compulsory assessment at the end of each year

will be discontinued. Compulsory assessments will now be limited to a few cases where

a specific notice is issued. This would make tax administration simpler and reduce the

costs involved in revenue collection.

       This system of self-assessment will be supplemented by audited mechanism

where the assessments of a certain number of traders, selected on a scientific basis, will

be assessed every year. This will ensure accountability and transparency in the system

while avoiding undue harassment of traders and dealers.

       Due to the inherent transparency and accountability in the system, VAT leads to

not only better tax administration but also higher levels of compliance and lesser

evasion. Tax evasion is a grave problem in a developing country like ours as it leads to a

creation of a „resource crunch‟ for developmental activities of the state. Reputed

international institutions like the World Bank and IMF point out that the VAT regime

prevents tax evasion and boosts revenues to help cash starved governments to come

out of their debt-trap.3

        It is because of these benefits that VAT has been adopted in every region of the

world, and by so many different kinds of nations. The system was initiated first in Brazil

mid 1960‟s while Europe adopted the system in 1970‟s. In Asia, a large number of

countries including our neighboring countries like China and Sri Lanka have been

following this system for a number of years. We too have modified our tax regime to the

VAT model and it seems that the experience so far by those states which have adopted

VAT has been very positive.

        If is seen that in states where VAT has been implemented there has been a

substantial increase in the tax revenues of the government. There has been an increase

of 20% of revenues in 2003-04 & 30% increase in 2004-054 in Haryana, Delhi has seen

29% rise in tax collection under VAT5.             Several other states have also reported

significant increase in tax revenues after the introduction of the new system. In the years

to come, it seems, VAT may provide greater revenue to the State governments.

Issues that need to be addressed

        The Kelkar Committee Task Force has, however, highlighted some important

issues that need to be addressed for the successful transformation to a VAT regime. To

ensure that the immediate benefits accrued so far from this system are not lost, those

issues should be examined.

  Pradeep Dinodia, Introductory Speech FICCI Conference on VAT: Issues and Concerns , August 31,
2005, New Delhi
  Economic Times, 6 Feb, 2005.
  Economic Times, 20 Aug, 2005.

        Preparedness for State VAT : There is a manifest need for public awareness

amongst the general populace. Joint Programme should be undertaken by all

stakeholders to disseminate information about VAT and its benefits.

        Uniformity of definitions : A conscious and earnest attempt needs to be made

by all state governments to ensure uniformity of all State legislations, procedures and

documentation relating to VAT. This would ensure greater harmonization between the

taxation regimes of different states, eliminate unhealthy competition and lead to the

integration of the domestic market.

        Compensation to States : The issue of compensation is possibly the most

controversial and problematic point of contention in debate surrounding VAT. It must be

tackled through mutually acceptable mechanisms.

        Unification of all local taxes : The introduction of VAT should be supplemented

by rationalization of the overall tax structure.

        Credit on Inter-state transactions : The recommendation of the task force that

needs to be effectively considered is the grant of credit of duty by the importing State for

the duty paid in the exporting State, in the course of inter-State movement of goods. The

implementation of this measure would ensure smooth inter-state trade and benefit the


        Stability and continuity of the VAT regime : Another aspect is step about the

creation of a VAT Council. The Empowered Committee of State Finance Ministers has

done good work in the implementation of VAT. A permanent suitable committee should

be considered and may be vested with adequate powers to take steps against

discriminatory taxes and practices and eliminate barriers to free flow of trade and

commerce across the country.6

Concluding Remarks

          I would conclude by hoping that critical issues in the implementation of the VAT

system would be addressed soon.                 With this, I congratulate the Sales Tax Bar

Association, for organizing this conference. I am sure that the discussion in the coming

two days would be highly productive and enlightening for all the participants.


    Report of the Kelkar Committee Task Force, www.indiainfoline.com


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