‘Manufacturing States’ or ‘Producing States’ will suffer in Vat system?
Since Vat is consumption based tax, revenue from tax goes to State where goods or services are consumed. Hence, one major criticism about Vat is that consuming States (like UP, Bihar, Rajasthan, Kerala, North Eastern States) will gain as there is more consumption of goods and services in that State than its production.
‘Manufacturing States’ or ‘Producing States’ like Maharashtra, Gujarat, Tamil Nadu and Karnataka will suffer as they will not get any tax revenue from goods manufactured in their State as the goods will be consumed outside the State.
Major portion of wheat produced in Punjab goes outside Punjab. Minerals produced in Jharkhand are mainly consumed outside the State. These States will suffer loss of revenue.
Prima facie, this argument seems correct. However, it should be noted that if manufacturing activities increase, there will be employment generation. Infrastructure of State will improve. This will increase income of people of the State. That income will obviously be spent in purchasing goods or availing services within the State. Revenue from all that sale and services will obviously go to that State only.
Thus, in long run, revenue of that State will increase.
If we make comparison of international transactions, on exports, the Government does not get any tax revenue. Does it mean that the exporting country becomes poorer as it does not get tax revenue from the goods manufactured in that country?