Meaning of VAT and MODVAT – Tax Structure of Government of India

In the Constitution of India, Union and state Government’s respective areas of administration and taxation are spelt out, One broad demarcation between the two types of governments is that on other than agriculture the union government can levy taxes and on agriculture related the States can levy. Broadly on 4 types of taxes, the union government makes legislation. They are

(a) Taxes levied and fully retained by the Union (e.g. Corporatioa
Tax);

(b) Taxes levied and collected by the union but are shared (e.g. Personal Income Tax)

(c) Taxes levied and collected by the Union but fully assigned to the states;

(d)Union government  only levies taxes but collected and enjoyed by the states.

Example of the latter two categories are Central Sales Tax, Stamp Duty, Excise Duty on Medicinal and Toilet Preparations.

The union government levies both direct and indirect taxes, of which some are progressive. proportional, regressive, ad valorem and specific. Any tax whose initial (incidence)
and final (impact) burdens are on the same person/institution, is a Direct Tax. the two burdens are
different persons, it is Indirect Tax. Most of the personal taxes are Direct and most of the commodity taxes are Indirect. If the tax rate rises, as income/wealth/expenditure rises, it is a Progressive Tax (e.g. personal income tax). If the tax puts relatively more burden on the poor. it is Regressive Tax (e.g. taxes on essentials consumed by the common people). If the tax rate is constant, it is Proportional Tax (eg. Sales Tax). Tax based on value of the goods is called ad valorem. Most of the taxes are valorem in India. Specific Tax is based on weight, area/size (e.g. tax per 1000 units of cigarettes of certain length or Tax per square meter of cloth).

The important taxes levied by the union government are: Non-Agricultural Income Tax (in brief Income Tax), Corporation Tax (evied on the incomes of Registered Companies/ corporations. Note income of a company means its profits. Hence Corporation Tax is tax on profits), Union Excise Duties (Excise Duty is tax on production) on other than Liquors and Narcotics (on the latter states levy Excise Duties), Custom Duties (mport and Export taxes), Wealth Tax, Expenditure Tax (on expenditure incurred in Star Hotels), Dividend Tax (at 10% on the profits distributed and it is paid by the companies), Capital Gains Tax (Tax on the differential income of sale and purchase prices of assets (such as shares), MAT (Minimum Alternative Tax at 7.5% on the Zero Tax or Zero Profit Companies, Service Tax (at 5%) etc. The government also levies Surcharges which is a tax on tax amount (e.g. surcharge of 10% to 15% on Income Tax amount. It is interesting to note that while about 80% of the Income Tax revenue is distributed to the states, surcharge collections are retained in full by the Union)

There is MoDVAT Modified Value Added Tax) in lieu of union Excise. From 2000-01 Modvat is renamed as CENVAT. Replacement of Excise/Sales Tax is regarded as tax reform It was France which introduced

VAT first time in 1954. Later the UK and USA introduced in 1972 and 1973 respectively. Value added means created or added value within a firm/production unit. It is equal to sales value less intermediate inputs and equals to the total of wages and surplus. If a tax is levied on the added value of the production unit, it is called VAT. Beginning from 1985-86, in India, Modvat (Modified VAT) was levied on selected industrial products. Gradually it is being extended to other industries and the 2000-01 budget envisaged to cover all the industries by abolishing existing Union Excises. Under Modvat, first the tax is levied on the sales value and rebate is later given for taxes paid in the earlier stages of production, subject to the production of vouchers. It is to be noted that the sum of the value added at each successive stage is equal to the final price of products and the sum of taxes paid at each successive stage will be the same as the tax which would be payable, if it were charged on the full value of the final product. It is the intension of the government to move to true VAT over the years  name of CENVAT.

Among all the taxes, the highest net revenue is yielded by Customs Duties (and within Customs, close to 98% is from Import Duties), followed by Union Excises and Corporation Tax. Remember here that gross Union Excise Duties Collections are the highest but out of the total
tax collected, states get close to one-half of the amount Hence, in net terms, the highest income yielding tax is Customs Duty.