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D. Murali

Theoretically, the country has gone VAT. Though there are apprehensions about, and opposition to, VAT, any tax system that opts for uniformity in the place of a larger scatter, and simplicity to replace an archaic labyrinth, is worth trying, even if the switchover is a leap of faith into the unknown, says D. Murali.

Protests against VAT... A troubled birth.

THE THIRD of the "Panch Priorities" or the five objectives that the Finance Minister, Mr Jaswant Singh, spelt out in the third paragraph of his Budget speech, just about a month ago, dealt with fiscal consolidation. If that were the end, the means were to be "tax reforms and progressive elimination of budgetary drags, including reform of the additional excise duty, introduction of service tax, and introduction of Value Added Tax (VAT) from April 1, 2003 at the State level". The previous two paragraphs in the speech were but the mandatory thanksgivings to the Prime Minister and the predecessor Finance Minister, and so one can credit Mr Jaswant Singh with a direct approach to his goals, in listing out things that could be easily counted with one hand.

The priorities were not given any "hierarchical order of importance", Mr Jaswant Singh said, but the tucking in of a highly sensitive issue such as VAT in among poverty eradication, infrastructure development, agriculture focus and manufacturing efficiency, was a tactical move. More important, while the other four among the `Panch' may take long in seeing tangible results, there is enough evidence of VAT having a troubled and quick birth, what with all the hue and cry in trading circles and conference circuits.

The downing of shutters by different groups of commerce, plus the odd translations of the tax into the State languages — which in some cases give the meaning of `additional tax' — are adding to problems.

That VAT is an indirect tax, levied in connection with the sale of a commodity, collected in stages from each business as the product moves from the producer to the consumer, and that the business can claim a credit for the amount of VAT paid by previous businesses in the supply chain, are all what experts and academics shout from rooftops, but the concern that shrouds the new tax boils down to a few simple questions such as: Will consumers have to pay more? Will the State governments lose revenues? And so on.

For Mr Jaswant Singh, VAT is a major milestone. In October 2002, the Conference of State Chief Ministers, presided over by the Prime Minister, had confirmed the final decision that all States and Union Territories would introduce VAT from April 2003. In February this year, the Empowered Committee of State Finance Ministers had endorsed the suggestion that all State legislation on VAT should have a minimum set of common features. And, in paragraph 130 of his speech where he came to "taxes, tax reforms, and the bookkeeping of the current year, as also 2003-04", Mr Jaswant Singh emphasised "six important aspects", of which the first was that "the coming year will be historic with the States switching over to a VAT". In the `highest tradition of cooperative federalism', a `path-breaking reform' and so on were how this was marketed in the Budget. In great hurry, the Finance Ministry cleared dozens of draft Bills from the different States.

Yet, with only hours to go for the expected arrival of VAT, the Finance Ministry's Web site is as silent as Baghdad before a bombing raid. The only bit of VAT info is what is tucked among press notes — a February 14 release talking about `strong support' from MPs. "In the meeting of the Consultative Committee of Members of Parliament attached to the Ministry of Finance and Company Affairs, Members of Parliament congratulated the Union Finance Minister on the progress made in creating confidence and building consensus among State Governments for the implementation of VAT." And the Finance Minister had emphasised that the introduction of State level VAT was one of the most important fiscal reforms which would make the commodity taxation system simpler and more transparent and was also expected to improve the revenues of the States. "The Minister added that a nationwide information and awareness campaign was being taken up with special emphasis on dissemination in the regional languages for better awareness and understanding of the VAT system." Something that is obvious by its absence.

The switchover to VAT is being seen as "a historic reform of our domestic trade tax system", because it would assist the States "to transit successfully from the erstwhile sales tax system to a modern domestic system, at present in use in over 120 countries". If we are aping the West, one can at least take heart that the US does not talk about VAT, though the tax is prevalent in the European Union (EU) countries. The general VAT rates in the EU vary from 15 per cent to 25 per cent; VAT is usually accounted to the country in which the product is sold or finally consumed. A plus point of VAT is that it aims to prevent repetition of tax by allowing the right of deduction. Thus, a company that is liable to pay VAT can deduct the tax included in the purchase price of a production input acquired for its business operation.

In the EU, the commonest costs from which VAT can be reclaimed relate to services purchased abroad — such as accommodation, restaurant bills, entertainment, vehicle hire, courses, training, fair expenses, road taxes, servicing costs, seminars, conferences, office and room rentals, mail, telephone and facsimile costs, subcontracting, fuel, diesel and so on. Countries such as Iceland, Monaco, Norway and Switzerland have a VAT system in place. The Czech Republic, Estonia, Hungary and Poland refund VAT to foreign companies, and Canada refunds sales tax to foreign companies.

But the main problem in India is more within — where the States tug at the Centre for more funds, and jealously guard avenues that offer them tax inflow. The recent move by a few States to levy sales tax on telephone rentals — that have already been suffering service tax for almost a decade — shows how desperate the State governments can get when it comes to garnering funds, even if it be at the cost of adding hardship to the public.

The image of Commercial Taxes Departments (that administer the General Sales Tax Acts) in the country is not much to write home about. Sheer multiplicity and complexity in legislation can deter businesses from spreading their operations to different States. But we are not alone.

A Web site that discusses Internet taxation in the US states that there are over 7,000 different taxing jurisdictions that would like to impose sales taxes on the Net deals, though elsewhere the same page states: "In the US alone, the Internet is susceptible to more than 30,000 potential state and local taxing jurisdictions." The truth could lie somewhere in between.

Here, as a lollipop to get the States toe the Finance Minister's line and take the plunge into the vat of the unknown, there is a generous statement in the Budget: "In view of the apprehensions expressed by a large number of States, about possible revenue loss, in the initial years of introduction of VAT, the Central Government has agreed to compensate 100 per cent of the loss in the first year, 75 per cent of the loss in second year and 50 per cent of the loss in the third year of the introduction of VAT."

Losses could be more than provided for in the Expenditure Budget, it is criticised; and State governments complain that their individual losses would be more than that factored in by the Finance Minister.

Going by Murphy's Law, consumers are well aware that prices would go up, not so much because of VAT, but because hikes do not normally need any justification, just as when benefits are announced, they do not get passed on to the ultimate consumer. Other factors such as fuel price hikes, general uncertainty in the economy, business slowdown and so on could also play their part in any upward movement of prices.

Whether VAT would generate more commerce, whether the tax net would cover a higher percentage of transactions, whether revenue realisations would ring a happy bell in the government coffers, whether credits and refunds might alarmingly overtake collections, and whether information technology would get embedded in the whole system to capture the behaviour of the chain are all questions that may not get any immediate answers.

However, a question that would be the most relevant would be whether the new system can usher in a move for better or for worse. Though `better' and `worse' could be as subjective as `good' and `bad', any tax system that opts for uniformity in the place of a larger scatter, and simplicity to replace an archaic labyrinth, is worth trying out, in spite of apprehensions that may make the switchover to VAT as a leap of faith.

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