The Hindu Business Line : VAT anxieties

SOONER THAN LATER, State governments will have to break new ground in the Centre-State fiscal relationship. The much-debated Value Added Tax (VAT) is a sales tax, levied at a commonly agreed rate by the States and collected in stages until consumption. Freedom to tax trade is a federally granted discretion that many politicians may be reluctant to give up. Uniformity in rates, as with anything in India, may have to be fought hard for and won, but for the consumer it is a welcome step.

The panic and mistrust among the dealer community must, however, be acknowledged. Whoever determines or collects VAT, the trader will now have to open his books to scrutiny, because the tax is on the sum total of business costs plus profits; and there lies the rub. Hitherto, a single-point regime was convenient both for the tax collector and the organised sector producer/tax-payer. Profits or costs of the channel that took the product to its destination never directly entered the reckoning on every transaction. In fact, the total dealer turnover was only an estimate by the commercial tax authorities, and this was done by various decentralised methods leading inevitably to both sides alleging leakages, harassment and double accounting. We must remember that historically every political party built its local organisation and funding on the primary support base of millions of bazaar retailers and wholesalers. The bania admittedly may have lacked sophistication, literacy or even accurate record keeping but never in intelligence or lightning quick mental arithmetic. He has also long accepted the cost of pay-offs to various functionaries as being part of life and doing business and knows that nit-picking over accounts constricts the flow of untaxed income — a fact not unknown to politicians, who can ill afford to ignore the trader when fighting elections.

The routinely used device of the trader is the option not to make an invoice — some thing which your neighbourhood grocer or chemist will do even today. By not recording some part of the purchases and sales, the dealer controls the throughput declared at will. Not so, if you must collect and pay the difference over what you paid, that is, the value actually added. A second device that might now be useless is under-counting inventories. Taxmen have long used a judgement basis for reckoning the turnover, applying a ratio of average stocks to annual sales. Recording both inflows and outflows in full would of course capture the whole business process, something the trader, small or big, is ever reluctant to reveal. The fact is that VAT is a coloured tracer put on all transactions coursing through the economy, which helps the state to X-ray the anatomy anywhere, anytime. Dealer registration, unique ID numbers, bar-coding of goods, links to a central IT system — all these can, and do, work for the honest tax-payer, as with tracking personal income-tax, banking and investments. The issue is whether all are ready to embrace the benefits of transparency and honesty.

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