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Economic Effects Of Value Added Tax

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  • R Sthanumoorthy

Abstract

The article analyzes the effect of VAT on the macro-economic variables as savings, investment, tax regressivity, consumption pattern, tax revenue and foreign trade. VAT has the capacity to increase savings if it is substituted for part or all of the income tax and this has been proved empirically. Although by design VAT has regressive elements, in practice the regressivity of VAT depends on several factors such as the consumption patterns of higher and lower income groups, taxes replaced, the exemptions and zero ratings. The international evidences on regressivity of VAT reveal a mixed picture. In general, VAT promotes investment if it replaces distortionary taxes and earns more revenue to the government. Finally, VAT ensures that international trade takes place on a transparent basis and avoids distortions like tax cascading associated with alternative commodity taxes.

Suggested Citation

  • R Sthanumoorthy, 2006. "Economic Effects Of Value Added Tax," The IUP Journal of Public Finance, IUP Publications, vol. 0(4), pages 38-45, November.
    • Handle: RePEc:icf:icfjpf:v:04:y:2006:i:4:p:38-45
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