The Hindu Business Line : How IT can help in VAT

With a change of guard post-elections, it seems Tamil Nadu is all set to join the VAT club sooner than otherwise. Going by media reports, implementation of value-added tax (VAT) may well be the first demand that the new State Government will face from industry.

Two States - Tamil Nadu and Uttar Pradesh - and the Union Territory of Pondicherry are yet to adopt VAT, pointed out Dr Parthasarathi Shome, Advisor to the Union Finance Minister, when he spoke at an industry association meeting last week. In the absence of a credible IT-based information system, there will always be a tendency to inflate inter-State trade, Dr Shome had said.

How does IT (information technology) help VAT? Mr S. Madhavan, Executive Director, PricewaterhouseCoopers explains that since VAT is a multipoint tax, unlike sales tax (which was a single point levy, typically at first point), setoff is available for the input taxes paid at the earlier point.

"This is the fundamental difference between the two taxes," he adds. "As a result, the number of dealers who would be covered under the VAT net would be several times larger than that covered under the erstwhile sales tax. This extended coverage cannot be handled without a robust IT backbone."

Mr Madhavan foresees that, in a scenario where the CST (Central Sales Tax) rate is brought down to zero, it would be essential to prevent misreporting of local sales as inter-state sales. For, that could be a ploy to take advantage of the zero rating of CST, if the system were weak in reconciliation! "Here again, a robust IT infrastructure, to monitor and match inter-state transactions between the origin and the destination States, will be critical to prevent such mischief," opines Mr Madhavan.

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