Principal’s vicarious liability: An answer to Input Credit denial?

Abstract

A Value Added Tax implies tax on the value addition made by the supplier and simultaneously implies insulating the supplier from taxing value added by previous suppliers. In the Indian context, this scenario is theoretically achieved by the credit mechanism whereby the supplier receives credit of the tax paid on the value addition made by the previous suppliers. In practical terms, however, a number of conditions must be satisfied by the supplier before the credit becomes available. One critical condition is that the tax collected by the previous supplier is paid to the Government by such supplier. This paper argues that the Government (being the principal) should be held accountable for the acts and misdeed of the supplier (who is acting as the agent), including on account of the application of the vicarious liability principle.

Keywords: Agency, Tax Credit, Input Tax Credit, Vicarious Liability

JEL Classification: H25, K34