The Hindu Business Line : VAT: States can end the vexation

THE Finance Minister, Mr Jaswant Singh, needs to be complimented for being candid in elucidating the virtues of the value-added tax (VAT) while moving the Finance Bill in the Lok Sabha on April 25 though his views have been reported in a warbled manner even by financial dailies. VAT was to have been ushered in April 1, but could not be because of the failure of the State governments, the implementing agency, in doing the spadework for putting the new system in place.

Mr Jaswant Singh made it clear that VAT is an important initiative and a progressive piece of modern tax. Hence, he cautioned that trade and industry should not end up thinking the VAT as a "vexation added tax" just because the States do not do their homework properly. He said the Centre was keen that all States benefit from a modern tax system. He recalled his own Budget speech that "... the current year would be historic with the States switching over to a Value Added Tax and the Central government being a partner with the States in the highest tradition of cooperative federalism in this path-breaking reform... " Yet, the April 1 deadline for ushering in VAT was missed with traders and others backed by vested elements scuttling the move.

VAT is to replace the sales tax system in the States and Union Territories. Its implementation was taken up after a conference of Chief Ministers on November 16, 1999 unanimously decided so. This decision was reiterated at subsequent conclaves of Chief Ministers on June 22, 2000; July 5, 2001, and October 18, 2002. As per Entry 54 of List II

(State List) of the Seventh Schedule to the Constitution, tax on sale or purchase of goods is a State subject. So, on the express recommendations of the June 2000 Chief Ministers' conference, the States/UTs constituted an Empowered Committee of State Finance Ministers to deliberate on matters pertaining to the implementation of VAT. It was also agreed that any decision about representations of trade and industry and the procedures to overcome the shortcomings of VAT or rescheduling it would be taken by the Empowered Committee that would meet periodically.

The Committee would also deliberate on such matters as classification of commodities, avoidance of overlapping, removing exemptions and evolving a uniform rate both on structure and across products for ease and convenience of tax administration.

According to a 1991 IMF study on VAT,there are three main sets of reasons to adopt the VAT: revenue, neutrality and efficiency. Traditional income and sales taxes have been meeting public resistance and VAT provides a new, buoyant revenue base, typically yielding more than initial estimates as borne out by the experience of Indonesia, Korea, New Zealand, Portugal and Tunisia. The VAT also contributes from 12 per cent to 30 per cent of revenue for most countries, representing about 5-10 per cent of their gross national product. Attesting to neutrality, the IMF study found that VAT is non-distortionary — provided there are few exemptions and little zero rating. On VAT's efficiency, the IMF said the introduction of VAT provides an opportunity to sweep away the cobwebs and revamp the tax administration substantially. This is particularly so in the case of the sales tax departments in the States which need a root-and-branch reform to make them function well.

Be that as it may, an April 8 meeting of the Empowered Committee of State Finance Ministers reportedly decided that 16 States (including Haryana) would introduce VAT effective from June 1. Mr Jaswant Singh too, while moving the Finance Bill in the House, said that in late March and early April 2003 the Centre received the VAT laws passed by legislatures of seven more States for Presidential assent. In making it clear that the Centre is acting only as "a facilitator" in this tax reforms process undertaken by the States unanimously, the Finance Minister reminded the States that "certain number of sequence of actions have to be taken by the States themselves" in preparing for a VAT regime.

He said commodity classification, rate fixation, computerisation of bills, training of VAT personnel and identification of VAT items are some of the issues on which the Empowered Committee must evolve an administratively feasible common ground. He said the Centre has evolved a set of parameters on these lines and it must get satisfied that the States implementing VAT conform to these parameters.

Mr Jaswant Singh said that the Finance Ministry would send the check-list to the States so that its various components and the concerns spelt out by the Centre are addressed before the States embark on VAT. He also pointed out that the non-conformity of some of the important provisions of the VAT legislation presented for Presidential assent with what was prescribed by the Empowered Committee needed to be addressed by the States concerned.

Mr Jaswant Singh pertinently pointed out: "It is important to follow a uniform framework in terms of the basic structure of both the law and the rates across States for ease of tax administration, avoiding distortions as well as unifying the nation's markets".

Moreover, trade bodies and civil society have also expatiated on the scope for improvement in the VAT Bills passed by the States. As the Empowered Committee is all set to meet again tomorrow (April 29), the State Finance Ministers would keep in view the need for reconciling the various conflicting elements and tying up the loose ends in their legislation to preclude implementation of VAT in "a patchwork fashion" as picturesquely put by Mr Jaswant Singh. As otherwise, he said, "a very good tax system will be defeated by faulty implementation".

Instead of crying hoarse over the likely compensation they should get once they do away with sales tax and other cognate taxes and usher in VAT, the States should seize the chance of doing their homework for ushering in VAT because it encompasses tax on both goods and services.

A retail sales tax is usually identified with the sale of goods and not services. For instance, transport, telecommunications, professional services and construction are not usually taxed under the retail sales tax (RST). In practice, VAT has been applied to a larger tax base including most goods and services and, hence, requires a lower rate to glean the same revenue as an RST.

It is time the States geared themselves up to build institutional capacity and moved ahead on the road to operationalising VAT. In this daunting task, the Centre should also assist them in conforming to parameters set by the States so that the value-added tax is not interpreted as a vexation-added tax to both the States as also to the taxpayers.

The onus is on the States to sink differences, disabuse the imaginary fears and apprehensions of trade and industry and take on board the parameters and concerns voiced by the Centre so that operational glitches do not crop up to defeat the basic objective of the tax system that is touted to benefit the States largely.

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