Monday, August 20, 2012

Disadvantages of Value Added Tax (VAT)

It will be a virtual crime not to look for the other side of the coin of the Indian VAT System. Main disadvantages that have been identified in connection with VAT are as follows:

1. VAT is regressive.
It is claimed that tax is regressive i.e. its burden falls disproportionately on the poor since the poor are likely to spend more of their income than a relatively richer person.

2. VAT is inflationary.
VAT is too difficult to operate from the position of both the administration and business. Some businessmen seize almost any opportunity to raise prices and the introduction of VAT certainly
offers such an opportunity. However, temporary price controls are a result of the careful setting of the rates of VAT.

3. VAT favors the capital intensive firm.
It is argued that VAT has a direct impact on the tax of the labour-intensive firms compared to the capital-intensive firms. Since the ratio of value added to selling price is greater for the former,
this is a real problem for labour intensive economies and industries.

4. Powers given to Sales tax inspectors:
In order to give effect to the various provisions of the VAT legislation more powers have been given to sales tax inspectors. This may cause harassment to the assesses of VAT. This may
even lead to return of "Inspector Raj" which will play havoc and might lead to corruption in the system.

5. Central Sales Tax:
Central Sales tax is a major issue connected with the implementation of Value Added Tax in our country. There is a need to phase out CST and move to completely destination-based tax
system. It is a very difficult task as it is an important source of revenue for government.


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