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Home > Business > Columnists > Paranjoy Guha Thakurta

More worries over VAT

April 14, 2003

The April 8 decision of the empowered committee of state finance ministers postponed the deadline for implementation of a Value-Added Tax regime in the country to June 1.

The new deadline, like the previous one, would almost certainly not be met.

There are pressing political, economic and technical reasons why the implementation of VAT -- undoubtedly a superior taxation system than the current cascading type tax system -- will not happen in a hurry.

As this columnist had pointed out in an earlier article on the same subject, the world over, the transition to a VAT system has invariably resulted in a spurt in inflation in the short run. There is no reason to believe that the Indian experience would be very different.

Politicians in India and in any other democratic nation fear the fallout of inflation as it erodes real incomes and effectively results in a transfer of purchasing power from the poor to the rich, thus eroding popular support for the incumbent government.

Given the fact that elections to half a dozen state assemblies (including Rajasthan, Madhya Pradesh, Chhattisgarh and Delhi) are due in November and the next general elections are scheduled for next year, any move that results in the prices of a wide range of commonly-used products going up would be certainly opposed by politicians.

Finance Minister Jaswant Singh has already had to face a lot of flak in this regard from compatriots belonging to his own party, including leaders like Madan Lal Khurana.

The ruling Bharatiya Janata Party is supposed to have a base among traders and the trading community is right now up in arms against the implementation of VAT.

Over and above such political considerations, there are strong economic reasons and procedural constraints that bedevil the speedy implementation of VAT all over India.

After debating different aspects of the issue for more than two years, the empowered committee headed by West Bengal Finance Minister Asim Dasgupta had first claimed that all 28 states and all Union territories in the country had 'unanimously' agreed to implement VAT by April 1 this year.

This time round, Dasgupta has been more circumspect in his public pronouncements and stated that at least 16 states (besides, Haryana which has already implemented VAT from April 1) and two Union Territories are 'expected' to move to a VAT system by June 1.

The 16 states and two UTs -- Bihar, Orissa, Jharkhand and West Bengal in the east; Andhra Pradesh, Karnataka, Kerala and Tamil Nadu in the south; Goa, Gujarat, Madhya Pradesh, Chhattisgarh and Maharashtra in the west; Assam. Meghalaya and Tripura in the north east; and the two UTs of Pondicherry and Daman & Diu -- account for more than three-fourths of the county's total trade and industrial production.

As a note prepared by the Confederation of Indian Industry points out, ". . .a concern that has arisen is that apart from Haryana, where VAT already exists, none of the other northern states plan to adopt (the) VAT system by June 1, 2003."

The CII note adds: "While the first and primary objective of introducing a VAT system is to increase the competitiveness of the Indian industry by removing the cascading effect of the various state taxes and levies, an important objective is to also ensure that variations in rates are removed across the nation. With only Haryana having VAT in the northern region, this objective is likely to remain unattained in the current scenario."

Much still needs to be done to thrash out a host of unresolved issues and put in place effective systems and procedures necessary for the smooth implementation of VAT.

One of the thorny issues is the treatment of inter-state sales of inputs and raw materials. How are taxes paid in one state set off in another?

The obvious method is to do away with central sales tax altogether. But this clearly cannot be done in one go simply because of the revenue implications of such a move on virtually each and every cash-strapped state government. (This issue would be discussed in detail later.)

Votaries of VAT argue that the new tax system would drastically reduce evasion of sales tax -- the present norm of a consumer paying a lower price if he/she agrees to purchase certain goods without a proper bill or receipt would then become a thing of the past.

Moreover, VAT would ensure higher revenues for, both, the Union government as well as state governments in the long run by rationalising the tax structure and would benefit the consumer as well by lowering prices.

However, since none of these benefits would accrue in the immediate future, all those opposed to VAT have tended to take a myopic view of the current state of affairs.

Clearly, much remains to be done to educate not just traders, but also businesspersons and the general public about the benefits of VAT.

In particular, politicians and bureaucrats (especially those who covertly benefit from widespread evasion of taxes) would need a lot of convincing about the virtues of the new tax regime.

This task would have to be performed by the Union government together with state governments.

Simultaneously, a lot of homework needs to be completed to ensure that VAT is implemented smoothly.

First and foremost, the pieces of legislation to be enacted by different states have to be uniform if the benefits of VAT are to be realised.

As of now, different states have introduced clauses and sub-clauses in the draft laws pertaining to the items to be exempted from VAT, turnover limits and tax rates.

These have to be harmonised and a common commodity classification matrix has to be agreed on.

At present, the different draft laws have anomalies galore as a result of which certain products -- like life-saving medicines and agricultural implements -- are being taxed at excessively high rates.

If the states are guilty of having created a right royal mess in this regard, the Union government is also culpable for not having clarified the exact manner in which the Centre would states for their revenue losses.

Not only has a transparent formula got to be worked out, a mechanism of incentives and disincentives has to be put in place to reward states that implement VAT well and penalise those that don't.

As the CII has mentioned: "One of the primary factors contributing to the postponement of VAT implementation has been the unpreparedness on the part of the states and Union Territories for the efficient and effective implementation of VAT."

In this connection, certain important steps that have already been taken by the Haryana government -- the only state government to have gone ahead with a VAT system -- to put in place a technological and regulatory mechanism for a smooth transition to a VAT regime, are worth noting.

The Haryana government has been automatically allotting new Tax Identification Numbers, or TINs, to existing registered dealers.

Such dealers have been directed to submit a fact sheet within a month to the state tax authority for issuance of a new registration certificate. This has reduced some of the procedural hassles of submitting a fresh application to obtain a TIN.

The state government has allowed tax credit on opening stocks of tax-paid goods as on April 1. Information about credit availed would have to be provided in the fact sheet to be submitted before the end of the month.

Haryana has allowed manufacturers to purchase all raw materials and consumables on payment of a 4 per cent sales tax if the rate is otherwise higher.

The state government has not specified a list of raw materials for this purpose with the exception of petroleum products like diesel, petrol, light diesel oil, et cetera.

The Haryana government is allowing full adjustment of tax paid on capital goods on furnishing the necessary receipt. The state has adopted a simple definition of 'capital goods' by including in it all plant, machinery, dies, tools and equipment provided such purchases have been capitalised in the manufacturer's balance sheet.

Then, the state has specified that registered dealers who have purchased taxable goods above Rs 1 lakh (Rs 100,000) and below Rs 25 lakh (Rs 2.5 million) in a year have the option of paying 1 per cent tax on the value of purchases subject to a minimum payment of tax of Rs 900 per month.

As a measure to simplify the tax administration, such dealers need not maintain any separate accounts of sales. (The CII is of the view that the minimum tax amount of Rs 900 a month is on the high side.)

The Haryana government has also undertaken not to levy any tax on products that attract additional excise duty, including items like sugar, tobacco and textiles.

The CII is unhappy with one particular aspect of the Haryana government's implementation of a new VAT regime and this pertains to conversion of existing tax exemptions to tax deferment.

This move, the apex industry association has argued, would adversely impact manufacturers. It would have instead preferred a continuation of the tax exemption benefits granted for specified periods.

Whether other state governments, especially governments in northern Indian states adjoining Haryana like Uttar Pradesh, Punjab, Delhi and Rajasthan, would be able to follow Haryana's example remains to be seen.

Most of these governments are following a policy of wait-and-watch and are clearly under-prepared to make a quick transition to a VAT system.

The governments of Delhi and Rajasthan -- both ruled by the Congress -- are particularly worried about the political fallout of moving to a new tax system that is bound to antagonize the wealthy and influential trading communities in these states before elections take place.


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Paranjoy Guha Thakurta




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Number of User Comments: 11




Sub: vat

no


Posted by ashu





Sub: who is benifitted from vat that is a big questionmark

I am sorry to say that Industrial concerns are against VAT where the protests are shown for past one month in places like erode , ...


Posted by Pawan daga





Sub: vat

Traders are never against vat or any tax as consumer pay for it,it is the implemantation process which thr traders are against.Fear of harresment,increase in ...


Posted by nirmal k. nahata





Sub: confusion

The traders in W.B. do not what VAT is and officials contacted have also expressed their inability to define it properly.I guess the government should ...


Posted by s.mohan





Sub: Implementation of VAT in India

I find your article and observations quite interesting. I have myself been keeping a watch on developments on the VAT issue but have serious reservations ...


Posted by Sunil Newatia




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