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The superiority of VAT over other forms of indirect taxation lies
primarily in two things: one, it provides an instrument of taxing consumption
of goods and services in the economy while avoiding needless interference
with market forces. Two, it helps to free exports from domestic trade taxes
in a way which is not possible otherwise. In short, it ensures neutrality,
both internal and external. Additionally, it offers a buoyant but non-
distortionary source of revenue for governments by virtue of its wide base
and structure. An invoice-operated VAT also aids tax enforcement by
providing an audit trail through different stages of production and trade.
These are the reasons for which the popularity of VAT has spread so fast
across the world including many developing countries.

If, however, the benefits enumerated above are to be reaped, VAT
should (i) apply to all goods and services with minimum exclusions, and (ii)
adhere strictly to the principle of destination, following, preferably, the tax-
credit method whereby exports are easily freed of tax and imports taxed on
the same footing as domestic products. These are necessary to ensure that
the tax system does not distort resource use or act as a drag on
competitiveness and also that revenue goes to the country∕state of destination.

In a country where the powers of indirect taxation belong
exclusively to the national government, as is common in a unitary polity, the
destination rule is relatively simple to implement. The position is different in
a federation where the powers are shared among different levels of
government. For when commodity taxes are levied at subnational (States)
levels, operation of the destination principle requires zero-rating of inter-
state sales. This is imperative from the angles of both trade neutrality as
well as inter-jurisdictional equity (so that no State treads on the tax space
of another). But administratively, zero-rating of inter-state sales poses
problems because of the absence of "border control" on the movement of
goods across State boundaries. Moreover, where, as in India, taxes on trade
are levied at two levels of government, there are intractable problems of
"vertical" harmonisation.

For all these reasons China has gone in for a national VAT while
reforming its tax system radically last year. Even in a staunchly federal
country like Switzerland the people have voted for having a VAT levied at the
federal level. In Canada too a national VAT is being seriously talked about
to replace the federal Goods and Services Tax and the provincial retail sales



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