The Hindu Business Line : Premature conclusions

IT IS PREMATURE to expect the system of Value Added Taxation to have led to a buoyancy in the tax collections of States, as Mr Asim Dasgupta, Chairman of the Empowered Committee of State Finance Ministers, seemed to imply the other day. The 12 per cent growth in collections by States that have implemented VAT has to be seen in the context of a number of factors before any conclusions on better compliance by the trading and consuming community — the much touted virtue of this regime — are pronounced.

For the average growth rate by its very nature does not make any distinction among States with vastly differing tax bases with a superior performance by one masking sluggishness elsewhere. Further, with the economy expected to post a nominal rate of growth of 11-12 per cent, the collections can be expected to grow at this rate even without any dramatic improvement in tax compliance. Indeed, only when it is shown that the States that have implemented VAT have achieved a higher rate of growth in tax collections than those that have not can a case be said to have been established for the above proposition. Anyway, the case for VAT should rest not on the grounds that it enhances revenues for the perennially cash-strapped States — though that could well be the spin-off — but because it is a progressive measure that maximises consumer welfare. With the BJP-ruled States staying away in the first phase of implementation, perhaps it was an occasion for scoring some political points.

But collection trends apart, the ministerial panel can justifiably be proud of its record in managing the transition in the implementing States as they moved from one regime of taxation to a more radical alternative. After all, the criticism that the system is impractical or the fear that it would bring all commercial activities in the implementing States to a halt has proved to be largely misplaced. The performance of individual States is in line with expectations. It was well-known that the new regime would benefit the consuming States more than the producers as under VAT the burden of taxation is shifted to consumers. No surprise then that Maharashtra, with a production base that is vastly out of proportion to its own consumption, should struggle to record a rate of growth in line with past trends. Equally, that Karnataka, with its hordes of high spending IT professionals, should have recorded a handsome increase in tax collections.

This has cast a heavy burden on the Centre to show a heightened degree of sensitivity to the fiscal concerns of the States. The proposal to release ad hoc grants against revenue losses, based on the initial demands from the States, is a step in the right direction. The Centre has, thus, eliminated a potential irritant to the whole-hearted implementation of VAT by the States. The ministerial panel must now actively engage with the States that have been reluctant on VAT for political or other reasons and ensure that they fall in line. If the country has to switch to an integrated Value Added Tax regime encompassing value creation in both manufacturing and distribution, it is essential that the concept be accepted universally. The Empowered Committee has its task cut out.

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