How the tax rolls the world over

It’s a big leap forward. One of the biggest changes in the country’s tax system is the move towards value added tax (VAT). In simple terms, VAT is a sales tax levied on the sale of goods and services.

In some countries such as Singapore and Canada, the tax is known as goods and service tax, or GST. In India, the implementation of this tax will begin from April 1, ‘05.

The main difference between the normal sales tax and VAT is that under VAT, the cascading effect of taxes is eliminated, because one can take credit for the taxes already paid on inputs.

In India, the finance minister has released a white paper on VAT with the proposed rates.

At this stage, it would be interesting to look at how the rates compare with the rest of the world.

A word of caution is in order here: The rates here refer to the standard rate for the country. Countries have a clear demarcation in the form of a standard rate and a reduced or concessional rate for several items.

Europe has adopted VAT with full strength; this tax has become the mainstay for several countries in the continent.

A common VAT system is compulsory for the European Union and has been imposed by a series of directives, though members have negotiated some exemptions or variable rates for specific territories.

The minimum standard rate of VAT in the European Union is 15% although different rates apply in the member states. The maximum rate in the EU is pegged at 25% .

Some of the other bigger economies in Europe too have slightly higher rates.

A few of these are France with 19.6%, Germany with 16% and Italy with 20%. Netherlands and Portugal are also on the higher side at 19%. As far the UK is concerned, the standard rate is at 17.

There are several countries where the rates are lower. In the absence of a minimum rate requirement, the figure in some cases has dropped below the double-digit mark.

Two countries that are examples of a lower rate are Singapore with a standard rate of 5% and Canada where the rate is 7%.

Australia is not far behind at 10%. Switzerland has a rate of 7.6%.In China, though, the figure is on the higher side at 17%.

Countries like South Africa at 14% and Sri Lanka at 15% also have a VAT system in place.

While the US does not have a VAT, it most states, counties and cities levy sales tax, with rates varying between 4% and 7% across the country. Colorado and Virginia have rates slower than 4% while Mississippi is at the higher end of 7%.

In India, the government has announced rates that will be implemented from April 1, ‘05.

Around 550 goods will be covered in the first phase. There will be two standard rates of 4% and 12.5% plus a specific category of VAT-exempted goods and a special rate of 1% for gold and silver ornaments.

A maximum of 270 goods will be covered under the 4% rate, comprising necessities like medicines, agricultural and industrial inputs, capital goods and declared goods. The remaining goods will be covered under the 12.5% rate.