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C. Shivkumar

The issue dogging the States in the event of VAT implementation is the possibility of revenue compression especially in State sales/commercial taxes. Such taxes comprise almost 75 per cent of the States' internal revenue base, according to sources.

BANGALORE, Oct. 1

FACED with mounting resistance from State Governments, implementation of the value-added tax (VAT) by the next fiscal year is now uncertain.

The original schedule for implementation of the VAT was from this year but was deferred to April 2003. However, sources said, "It is doubtful if any of the States has the wherewithal for implementing it next year."

These doubts have arisen because few States have taken steps to raise the revenue buoyancy. In fact, widening the tax base is one of the most critical elements for implementation of the VAT. Consequently, the issues dogging the States in the event of VAT implementation is the possibility of revenue compression especially in State sales/commercial taxes. Such taxes comprise almost 75 per cent of the States' internal revenue base. Consequently, switching over to a VAT on this component of taxes, the sources said, could lead to serious revenue shortfalls.

Further, the sources said with most States in the move to cut revenue deficits, shortfalls in revenues would escalate the situation, they said. Fiscal deficits at the State levels are currently estimated at about 7-8 per cent of the respective State domestic products. Such high revenue deficits were unsustainable and a further fall in revenues could compound the situation, the sources said. The revenue shortfall is anticipated because in VAT only the value addition is taxed. So far the taxation is based on the entire value of commodity/product. VAT consequently eliminates any cascading effect leading to compression in the tax revenues.

Though such compression in revenues could be neutralised by widening the tax base, few States have ventured in this direction. As a result, the average tax to SDP ratio is barely seven per cent for most of the States. Further, the sources said that the tax buoyancy has been falling in most of the States. This implied that SDP growth has not necessarily translated into rising tax collections.

Since these components needed to be put in place, implementation of a VAT in the States was likely be to delayed, unless the Centre could meet any potential shortfall in States' tax revenues. The sources said what the Centre had offered is to compensate up to 75 per cent of the shortfalls up to a period of three years.

However, the sources said that the States have sought that such revenue shortfalls be made in the form of greater shares in Central taxes or in the form of grants. None of the States is prepared to accept a situation where the central support is to be made in the form of loans. Such a support would only result in increasing the interest burden, especially at a time when the states are moving to reduce debt-servicing costs in the revenue expenditure.

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