The Hindu Business Line : White and well written

VOLTAIRE once remarked, "In the matter of taxes, every privilege is an injustice." Value Added Tax (VAT) in India, behind schedule by a few years, attempts to prove the statement wrong.

If one looks at the White Paper (WP) on VAT that has been brought out by the Empowered Committee (EC) of State Finance Ministers, there appears to be no reason why there should be a further delay in the implementation of VAT. The EC deserves kudos for condensing the provisions of this legislation into 24 Adobe pages.

Today, there is no necessity to give a justification for the move over to VAT. The WP summarises all the good things about VAT succinctly. Although the WP expresses concern at the resistance of Uttar Pradesh to give its nod to VAT, it needs no mention that a radical changeover to a brand new system of taxation would initially have nay-sayers, who would jump into the bandwagon sooner rather than later.

It is by now a certainty that the marquee States, such as Karnataka, Tamil Nadu, Andhra Pradesh and Maharashtra, would switch to VAT with effect from the new financial year. The experience of Haryana remains an inspiration for States to give their nod to VAT.

The WP also condenses the salient provisions of VAT succinctly. It states that in case there is an excess input tax credit which remains unutilised after a period of two years, a refund can be claimed.

Input tax credit is available for capital goods, too, which however needs to be spread out over 36 months a la the existing Central Excise Act.

The EC may need to look into these timelines since, in case of a refund of input tax credit on capital goods, which would be high due to the value of the goods, the above formula would suggest that it might take up to five years to get a refund.

If VAT is built into the cost of the asset which depreciates in three years, a refund at the end of the fourth year would create needless accounting/tax complications for those utilising it.

The WP hints at a refund of input taxes paid on exports within a period of three months. One has never heard of sales tax refund in the past and, hence, some export associations are ridiculing the 90-day limit and challenging its practicality.

The WP provides some relief to traders/manufacturers who have had a bad financial year and have not sold goods that they purchased in the period April 1, 2004 to March 31, 2005.

One hopes that this does not turn into a tax planning measure by traders to ensure that they pay minimal VAT from April onwards by selling their wares only after April.

Although there is a clause about verification by the Department, the USP of VAT— simplicity and transparency — would make a trader who does his homework perfectly to escape the tax net.

The WP nonchalantly states that a certain percentage of the dealers would be taken up for audit every year on a scientific basis.

If the dealer has evaded tax, previous periods would also be taken up for audit.

A refreshing change has been mooted by delinking the audit wing from the tax collection wing to prevent bias.

However, a very long time limit of six months has been provided to complete the audit, which would appear endless to a dealer.

Obviously, the dealers subjected to audit would be the ones who are under a tax audit under the Income-Tax Act/Sales Tax Act. In case there is a prolonged audit by the audit wing, it could invite a small comment by the auditor — who would smell something wrong — in his report which could open a Pandora's box for the dealer.

It is now certain that Central Sales Tax (CST) would stay for at least a couple of years and the WP affirms this fact too. The experience of Brazil, which implemented VAT decades ago but still has a form of CST, should force the Government to come out with a finite timeline to repeal CST.

The Government's decision to compensate the States at 100 per cent, 75 per cent and 50 per cent in the first three years of the VAT era should balance the finances of the States, although there is a lurking fear that any distortion in the finances of the Centre would result in a "VAT Cess" which burden would fall on the consumer.

In conclusion, it can be said that the EC has brought out a practical White Paper on VAT.

The WP summarises this best by stating that it is an expression of the genuine commitment of the States to shift into VAT mode from April 1.

The nuts and bolts of the legislation could always be ironed out later.

(The author is a Hyderabad-based chartered accountant.)

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