The Hindu Business Line : The disturbing elements of VAT

While the Government's determination to see the VAT system launched on April 1 is welcome, certain problems need to be set right first. These include the concern over allowing officers to enforce penal provisions and reopen closed assessments, as also the ambiguity regarding the rates applicable on a host of items. Traders feel that all penal provisions should be made effective only from the third year of introduction of VAT because when a new regime of taxation takes effect, mistakes are bound to happen out of ignorance or oversight.

THIS time around the Union Government appears determined to introduce Value Added Tax on April 1.. It is about time the jinx was broken, for each time the government goes back on an April 1 deadline, there is confusion and uncertainty about the system's merits.

After all, India has debated VAT for a full ten years. And to quote the Finance Minister, Mr P. Chidambaram: "It is nobody's case that we should debate this for another ten years.".

However, in its determination to meet the VAT deadline, the Government may be overlooking some basic problems of trade and industry, though these are not insurmountable and can be set right without much delay.

First, the VAT law contains some alarming penal provisions, including reopening closed assessments, hefty fines and imprisonment without the option.

Traders find this disturbing. They point out that all penal provisions should be made effective only from the third year of introduction of VAT because when a new regime of taxation takes effect, mistakes are bound to be committed out of ignorance or oversight.

"Even the officers concerned themselves do not often know the system well," observes Mr S. Rethinavelu, President, Tamil Nadu Chamber of Commerce and Industry.

When Mr Rethinavelu pointed this out to Mr Chidambaram at a recent meeting on VAT in Chennai, the Finance Minister replied: "Show me a sales tax law which does not have penal provisions".

Second, traders have expressed apprehensions over the provisions allowing reopening of closed assessments. They point out that VAT, after all, is an indirect tax. The trader collects the tax from the customer and passes it on to the government. The goods are sold and the customer is gone.

The assessment is done by an officer of the Department. Years later, if a case is reopened and there is a demand from the Department, from whom will the trader collect the additional tax?

Trade bodies point out that there have been such cases. An officer clears an assessment going by one interpretation or one classification of the product.

For example, `fruit pulp' is taken as raw or intermediate material and taxed at 4 per cent.

Years later, another officer can reopen the case, and taking another interpretation, classify the fruit pulp as a finished product and demands tax at 12.5 per cent, retrospectively. That one assessment can close down a trader's business.

To take another example, `rice', an essential commodity, is taxed at 4 per cent. But what about broken rice? Is it a raw material or a processed product?

A problem with this very commodity arose in Tamil Nadu a few years ago, and the traders got their way only after a long legal battle and much lobbying. The third problem that traders have is the rate at which items that are not explicitly mentioned in any schedule will be taxed.

Under the proposed law, there are to be four rates — zero (or exempt list of items), 1 per cent for gold, 4 per cent for specified raw material and intermediaries, and 12.5 per cent for products mentioned, including "miscellaneous items not covered under any other schedule". There are "only" 217 items in the `12.5 per cent list', the 217th item being the said "miscellaneous items not covered elsewhere".

This, according to the industry, is anti-growth. Today, there are a number of new products entering the market. If they are all taxed at 12.5 per cent, no industry will come forward to manufacture those items. They will continue to be imported. Is it not better if the "residuary items" are taxed at 4 per cent — after all, the government can shift any item to the 12.5 per cent category at any point in time, prospectively.

Another point frequently made is that there ought to be a rate between 4 per cent and 12.5 per cent; otherwise, too many items suffer a very high rate of tax.

The Government seems in no mood to relent on this, perhaps out of revenue considerations.

Trade experts point out that it is not quite right to say that VAT will completely eliminate evasion. There could be evasion right from the first stage of manufacture, they say.

Goods are stocked at unauthorised godowns, sometimes truck depots, and sold to traders, completely bypassing scrutiny.

A high rate of tax would only encourage such evasion and honest traders' businesses will be affected.

Again, the Finance Minister has categorically said that central sales tax will not go, even after VAT is introduced.

The CST is non-VAT-able and, hence, the industry finds it out of consonance with a VAT system.

The reluctance to abolish CST is obviously because the Centre has promised the States that it would make good any shortfall in revenue collections. The continuance of the CST is to ensure that the Centre has enough sources of revenue, in case it has to abide by this promise.

While those in industry circles understand the Finance Minister's position, it is not clear why he cannot commit to a timetable for abolition of CST.

Mr Chidambaram has only said that "sometime during next year" the Empowered Committee of State Finance Ministers will examine the issue. The industry, however, seeks a firmer commitment.

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