Value Added Tax (VAT)

An added tax is such an indirect tax that is imposed on Value Added at various stages of production. Value added refers to the difference between the value of output and the value of intermediate consumption. This concept is prevalent in most countries of the world. VAT in fact is the multi-stage sales tax. It is imposed at each stage of production “A full-fledged VAT is, in essence, an ad valorem tax on domestic final consumption level and collected at all stages between the point of production and the point of final sale.”

VAT is imposed on value added at each stage of production. Value added is the market value of sales minus purchases of non-factor inputs.

Value Added = Total Sales – Cost of Intermediate Consumption = Final Sales = Gross Domestic Product = Rent + Interest + Profit + Wages

Estimation of VAT involves the Invoice method. This method involves taxation at each stage of production. The producer is then offered exemption or compensation on the tax paid on the purchase of intermediate goods and services. So that, in effect, each producer has to pay tax only on the value added not on the value of output. It is calculated on the basis of sale and purchase invoices. This tax has no relation with the size and weight etc. of the commodity.

In the Federal Structure of the Indian economy, VAT may be levied in three possible ways:

(1) Central Levy: VAT may be levied by the central government. The central government will fix the tax rates. The revenue thus collected is distributed among different states of the country.

(2) State Levy: VAT may completely be a tax levied by the state government. In such a case the central government has no role to play.

(3) Dual VAT: This is the type of tax imposed jointly by the center and the states. The area of responsibility of each government is clearly defined. One of its various forms is that the center regulates the operation of VAT from the stage of initial production to the stage of the final sale of the goods in the wholesale market. The tax revenue at the stage of the final sale in the wholesale market is realized and retained by state governments.

Merits and Dements of VAT

1. The principal merit of VAT is that it acts as a built-in check on tax evasion. Accordingly, the tax of the government enhances. Also, it involves a uniform rate of taxation. So that it becomes Neutral in nature. Further, VAT ensures more effective regulation and control of demand for various goods and services in the market. If necessaries of life are exempted, VAT acts like a progressive taxation.
2. VAT involves a ‘cross audit’ of the invoices so that it can be effectively implemented. In a poor country dominated by a large number of small enterprises, VAT may prove to be an effective instrument of taxation.
3. However, compared to sales tax, VAT is certainly a more complex system of taxation. It moves a lot of bookkeeping and audit control. It is quite an expensive system and encourages inflation. Authorities do not get cooperation from the people. It is difficult to adopt this system in underdeveloped countries because of administrative inefficiency. Despite these shortcomings, VAT is being increasingly adopted in place of sales tax in most nations of the world.
4. VAT widens the tax net by covering ‘goods’ as well as services. A separate tax on specific services (as it exists in India at present) is no longer required. Integrating services’ with ‘goods, tax venue is expected to substantially rise.

General Agreement on Trade and Tariff (GATT)

After World War II, several international institutions were proposed to help rebuild war-torn economies, boost their growth, and support global trade. The key ones were the International Monetary Fund (IMF), World Bank, and the International Trade Organization (ITO).

The IMF and World Bank were established in 1945, while the ITO started in 1947. The ITO aimed to promote international trade and lower trade barriers, and it was agreed upon by many nations. However, it faced challenges and was never fully implemented.

In the same year, a group of nations signed the General Agreement on Tariffs and Trade (GATT), which aimed to reduce tariffs and encourage international trade. GATT came into effect on January 1, 1948, playing a vital role in shaping global trade policies.

What is GATT

The GATT (General Agreement on Tariffs and Trade) was all about reducing trade barriers, especially tariffs. It established rules and principles to boost global trade. These rules encouraged countries to treat each other fairly in trade matters.

GATT had eight rounds of international discussions, with the last one finishing in 1993 in Uruguay and becoming known as the Uruguay Round. During these rounds, countries agreed to lower tariffs and cooperate in trade.

In simple terms, GATT was an agreement among countries to make trade easier and fairer by reducing tariffs and following certain rules.

Objectives of GATT

Important objectives of GATT are as follows:

1. Expansion of international trade.
2. Increased level of productivity with a view to ensuring full employment in the member countries.
3. Expansion of world resources and their fuller utilization.
4. Increased level of living for the global population.
5. These objectives of GATT are very general in nature. However, these are sought to be achieved following a rigorous policy of free and multi-directional international trade.

Principal Elements of GATT

According to Prof. Elseworth GATT is based on the following principles:

(1) Trade is to be conducted in a non-discriminatory manner:

If a member nation is granted any concession in tariff by the other member nations, the concession so granted will automatically extend to all member nations of that GATT. This indeed is the chief principle of GATT. Accordingly, all member nations will get the Most Favoured Nation Treatment – MFNT.

(2) Discouragement to Quantitative Restrictions:

Barring a few exceptions, GATT seeks to discourage quantitative restrictions on international trade. However, no coercion is to be used in reducing the quantitative restrictions. Only the policy of moral persuasion is to be adopted. In this context, Prof. Elseworth is of the view that GATT may not succeed in altogether eliminating quantitative restrictions. Nevertheless, it may certainly succeed in alleviating the “balance of payments problem’ of the member nations. GATT favors quantitative restrictions only in the following circumstances:

(a) When owing to an unfavorable balance of payments, there is a serious problem, of foreign exchange reserves, (b) When imports act as a hindrance in the Price Support Policy Production Control Policy of the member nation (c) When less-developed member nations are pursuing some specific program of growth dynamism.

(3) Disagreements are to be Reserved Through Consultation:

According to clause XXIII of the Agreement, member nations are required to sort out their differences through mutual dialogue. However, unresolved issues may be reported in the annual meeting of GATT. A committee may be appointed to look into the areas of disagreement. The decision of the committee becomes binding on the concerned member nations. In case of violations, the member nation may be deprived of all possible concessions. Thus far, there have been no notable violations. Chile edged a complaint against Australia that the latter has sabotaged her exports of natural Sodium nitrate by way of offering subsidies for the production of synthetic Sodium nitrate, Australia responded positively to the GATT ruling suitably amending its subsidy policy and satisfying Chile’s objections.

The GATT was replaced by WTO on January 1, 1995.

World Trade Organisation (WTO)

About 50 years ago, the Bretton Woods agreements were created to manage the global monetary system and trade. The International Monetary Fund (IMF) and the World Bank led this effort, along with the General Agreement on Tariffs and Trade (GATT).

After eight years of negotiations during the Uruguay Round, 124 countries gathered in Marrakesh, Morocco, on April 15, 1994. Their goal was to boost worldwide trade by reducing trade barriers like tariffs and quotas, and by making it easier for businesses to access foreign markets.

They decided to form a permanent international organization called the “World Trade Organization” (WTO). This organization, similar in status to the IMF and the World Bank, would make sure that countries followed the trade agreements. The WTO started operating on January 1, 1995, with the aim of promoting fair and open global trade.

What is WTO?

The World Trade Organization (WTO) came into existence to boost global trade by replacing the General Agreement on Tariffs and Trade (GATT). It’s like a club for countries that agree on certain rules to encourage international trade and reduce trade barriers, especially in the United States.

The WTO is a significant development in the history of global trade, acting as a sort of international trade organization. It has a set of rules and principles that countries have agreed upon to promote international trade and reduce tariffs and import restrictions in the US and around the world. You can think of it as a new system for global trade.

The WTO was established after the Eighth Round of GATT negotiations, known as the Uruguay Round, which concluded on December 15, 1993. This agreement included 28 individual agreements that each GATT member country signed. In simple terms, the WTO is like a new and improved version of GATT, built on these renewed agreements, and it has more authority to enforce international trade rules.

The WTO has three main parts: a Council for Goods, a Council for Services, and a Council for Intellectual Property Rights. Together with institutions like the World Bank and the International Monetary Fund (IMF), the WTO plays a significant role in shaping global trade policies.

Objectives of WTO

Important objectives of WTO are as follows:

1. The primary aim of WTO is to implement the new world trade system as visualized in the Agreement.
2. To promote World Trade in a manner that benefits every country.
3. To ensure that developing countries secure a better balance in the sharing of the advantage resulting from the expansion of international trade corresponding to their developmental needs.
4. To demolish all hurdles to an open world trading system and usher in an international economic renaissance because world trade is an effective instrument to foster economic growth.
5. To enhance competitiveness among all trading partners so as to benefit consumers and help in global integration.
6. To increase the level of production and productivity with a view to ensuring the level of employment in the world.
7. To expand and utilize world resources to the best.
8. To improve the level of living for the global population and speed up the economic development of the member nations.

These objectives of WTO are more or less similar to the objectives of GATT. However, under WTO these sought to be achieved following a more rigorous and tougher enforcement of poli export competition, market access, and free trade.

Scope of WTO

Traditionally, GATT was concerned with the trade in goods which were mainly primary manufactured products. The General Agreement on Trade in Services (GATS) is the first multilatest agreement on trade that has as its objective the progressive liberalization of trade in services agreement. This agreement covers trade in all service sectors and the supply of service in all forms. WTO has a scope than GATT as new areas are included in the Agreement having implications for the production process of goods also. Agriculture, a controversial area, has been included and other areas that have implications for the production process of goods have also been included. The other new areas are:

1. Trade Related Intellectual Property Rights (TRIPS)
2. Trade-Related Investment Measures (TRIMS)

General Agreement on Trade on Services (GATS),

The WTO has tougher Implementation power and wider acceptance for the implementation of the Agreement than ever before under GATT. Its principal Agreements are as under-

WTO and INDIA

India is one of the founding members of the World Trade Organisation. India has 90 percent of its trade with those countries that are members of WTO. There has been a lot of debate on the issue of whether India would gain or lose by becoming a member of WTO or by signing the Dunkel Draft. The following arguments can be advanced in favor or against India becoming a member of WTO.

Disadvantages to India or Arguments against WTO

Critics are of the opinion that agreements on the provisions of GATT or WTO will be beneficial to developed countries alone and underdeveloped countries like India will stand to lose. Entry of foreign companies into India will rob our culture and traditions and the country will be plundered on the pattern of the East India Company.

Communist leader Somnath Chatterjee opined that the final document of GATT or WTO is a document that will render India a colony of developed countries once again. Future iterations of the nation will never forgive the ruling party for such a blunder.

The following arguments are given against GATT or WTO:

(1) Disadvantage to the Agricultural Sector: It is apprehended that by including agriculture in CAT or WTO, Indian farmers will become dependent on multinational companies for improved seeds and agricultural technology. The farmers will not be able to save better seeds from their crop and will be compelled to buy high rates insecticides, fertilizers, agricultural machinery, etc. from multinational companies, every time. Big farmers alone will be able to take advantage of improved farm technology. The cumulative effect of all this will be that small farmers, who are large in number, will be forced to sell their lands. This will further aggravate the problem of unemployment in the rural sector. Plants and cattle feeds will come under the ambit of patents and so will be under the control of multinational companies.

(2) Restrictions on the use of Brand Seeds: Under WTO, scientists and farmers will not be able to use brand seeds for commercial purposes. Under the circumstances, big farmers alone could buy foreign expensive seeds. It will be difficult for small and marginal farmers to make use of an improved variety of seeds. It will widen the gap of economic disparity.

(3) Patent Rights of Natural Products: If foreign MNCs took the initiative and secured patent rights over minor natural products of India, it may lead to serious consequences for Indian agriculture. For instance, neem can be used for making soap, toothpaste, medicines, etc. Similarly, there is a large demand for Psyllium Husk (Isabgol) in foreign countries. Their foreign patent may prove very expensive for India.

(5) Plant Breeding Protection: According to WTO, the protection of breeding has been determined by the Sui-Generis system. Indian farmers will have to spend large amounts of money to get a new and improved variety of plants and their dependence on multinational companies will further increase.

(6) Arguments against TRIMS: In terms of WTO, India could not impose any restrictions on foreign investment. Consequently, multinational companies will be free to establish their industries in India. It will harm indigenous industries. Domestic investors will suffer as they have little capacity to compete with multinational companies. As a result, on the one hand, the country’s production will get discouraged and the unemployment situation aggravated, and on the other, the dominance of multinational companies over the country’s economy will go on extending and their profits will continue to rise. All this will harm our economy.

Advantage of WTO for India

The above arguments have been advanced against WTO, but whereas reality is quite different. An in-depth study reveals that these arguments present only a one-sided assessment of the proposals. Some of the comments are totally baseless. Some of the main advantages likely to accrue to India by this Resolution are as follows:

(1) General Advantages: India is likely to get the following general advantages from WTO:

(i) Multilateral Trade Negotiations: India has been in favor of multilateral trade negotiations from the very beginning; because as a result, all member countries will enjoy the benefits of the Most Favoured Nation clause. As a member of WTO, it will be possible for India to enter into multilateral trade agreements with 124 countries. There will be no need to enter into bilateral agreements with these countries. Besides, customs tariffs will fall, and trade expand with the opening of new markets. It is hoped that as a result of WTO agreements world, trade will witness an increase ranging between 2000 and 3000 crore dollars. India can also increase the value of its trade by 150 to 200 crore dollars. This increase is in addition to the general rise in India’s foreign trade.

(ii) No Reduction in Subsidies: It is wrong to argue that there will be a reduction in subsidies to agriculture as a result of the WTO proposal.

Trade Related Intellectual Property Rights (TRIPS)

TRIPS’ is one of the principal elements of the Dunkel Draft (referring to GATT) subsequently adopted by WTO. Dunkel Draft places copy-right, trade works, trade secrets, industrial designs, and patents under the purview of TRIPS. This is not expected to be detrimental to India’s interest Because, barring patents in all other areas of TRIPs, the Indian judiciary and administrative services are of international standard. In the field of patents, particularly related to medicines, laws in India do not exactly synchronize with the Dunkel proposals. As a result, there may be some modem rise in the prices of medicines.

It is to be noted, however, that only 10 to 15% of the medicines in India fall within the purview of patents as proposed by Dunkel. World Health Organisation has kept essential and life-saving drugs out of the purview of the Dunkel Draft. Moreover, there is generous availability of non-patented medicines in India which should help contain the price-rise of patented medicines. Also, it is only after a period of 10 years that patent laws will come into force. This period should be sufficient for the Indian Pharmaceutical Industry to develop its own brand of effective medicines.

Incidentally, patents are given to inventions and innovations and not to discoveries. The natural gene or genetic material is away from allowing them to be patented. Thus, the following will remain outside the preview of patents: plants, animals, biological systems related to the procreation of plants and animals, and all such products that are detrimental to man, animals, or the general environment.

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