The Hindu Business Line : Justified fears

THE ONE-DAY STRIKE and the threat of an indefinite closure of trade and merchant establishments by a section over the introduction of a Value Added Tax (VAT) system is perhaps a reflection on the quality of consultation that preceded a vital piece of legislation. The merchant community has perhaps reason to be worried about the regulatory environment under the new tax regime, as the shape of the legislation is as yet unclear.

The White Paper on VAT issued by the Empowered Committee of State Finance Ministers had said that the initial apprehensions of the trade on VAT were no longer relevant with the advent of the new law, vetted by the Finance Ministry and in the process of enactment by the States. It had also promised national- and State-level consultations with the trading community getting a chance to sort out operational problems. But with many States still to enact their law on the subject, leave alone framing Rules and Regulations for its effective administration, a crucial component underpinning the promised consultative process is missing. And the deadline for ushering in a tax regime based on value added at every successive stage of commerce in goods is just over a month away. Moreover, the Empowered Committee had also promised a national level campaign targeted at the common people, traders and industrialists to communicate the benefits of VAT. There is still no sign of such a campaign. Indeed, such a campaign, even if under way, is meaningless in the absence of a legislative framework. On the face of it, therefore, the trading community case against VAT is not without some substance.

The manner in which the States went about trying to reform the sales tax legislation is an abject lesson on how not to introduce tax reforms. The law that States propose to implement is really not a tax on value added in successive stages of commerce in goods and services in the sense in which it is commonly understood. It is essentially a law that allows setting off the sales tax paid on inputs against that payable on output. Such a principle is already a feature of commodity taxation in some States with regard to the sales tax payable on manufactured goods against inputs sourced from within the State; this is perhaps aimed at providing incentives for employment generation within the territory. This principle merely needed to be extended across all goods and assessees. Aspects such as harmonisation of rates across States (to avoid any distortion in inter-State commerce) and the compensation of the consequent revenue loss could have been sorted out with the Centre. But the important point is that the existing sales tax legislation itself could have been tweaked to confer for the States all the benefits that a brand new legislation is supposed to do. The States could have made the transition to a tax law without cascading effects and the merchant community too spared of unnecessary fears about the new legislation.

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