The tax base for the federal VAT is industrial production. The tax base for the state VAT includes all goods with the exception of some industrial products, imports, agricultural inputs, food products and services. Agriculture, minerals and services are excluded from the tax.

Mexico implemented VAT regime in 1980 to replace 30 federal excise taxes and 400 municipal and state taxes. The tax base covers businesses connected with the sale of goods and services. Mexico has uniform VAT rates and bases across the states and it follows the destination principle. The tax may be regarded as a unified national VAT with revenue sharing.

The European Union (EU) has had a fully harmonised VAT since 1993. Initially it was achieved through the approximation of rates, i.e., by fixing a specified range within which VAT rates could vary.

The aim of commodity tax reform in India should be a comprehensive VAT covering value added by all business enterprises from the manufacturing to the retailing activities. The tax should be consumption based and follow the tax credit method to compute the net tax liability of a business firm. The tax liability of international and inter-state flows has to be computed by using the destination principle.

A more appropriate reform in India would be to impose a comprehensive state GST like in EU. That would require the Centre to withdraw from the field of VAT. The power to levy VAT rests only with the states. This scheme will avoid duplication by taxing authorities. Since state GST is a comprehensive VAT, including all goods and services (replacing both CenVAT and state VAT), its rate will be adjusted.

The Centre would be compensated this loss arising giving up collecting VAT by authorising the levy of sumptuary excises on a few select commodities.

A comprehensive VAT with the consumption base, tax credit method and the destination principle to determine VAT on international and inter-state flows can be an ideal commodity tax structure for India.