VAT is universal at last

VAT, or Value Added Tax is a progressive taxing system that was adopted by 21 Indian states a while back. By taxing goods and services at every stage of value addition, it improves tax collection and reduces tax evasion. In spite of the fact that the NDA government had initially proposed it, the BJP directed the states ruled by it to stay away from VAT. However, now that the benefits of the new regime are becomming amply clear, the BJP has decided to join the trend. This story was surprisingly under-reported. As this editorial from Good News India reports, it was a fitting climax to a slow thriller.

More information about VAT and its specific implications for India can be found here.

The Good News India editorial also has a great example of how VAT works.
What VAT aims to do is to charge tax only for value added to a product or service. Say you bought a bottle for Rs. 10 and a lid for Rs. 2 and each incurred a tax of 10%, a tax of Rs. 1.20 had already been paid. If you then stuffed pickles in it and sold for Rs. 50 you'd pay Rs. 5 as a tax; but you can claim a refund of Rs. 1.20 for taxes already paid.
The catch is that in order to get the 1.20 refund, the trader has to declare what he sold and for how much. So the government has a very good idea of every transation in the economy as it is in the trader's best interest to report it for the purpose of refunds.

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