The Hindu Business Line : What State the VAT?

THE WHITE PAPER on the Value Added Tax, released by the Empowered Committee of State Finance Ministers, does no doubt offer some insights into the legislative framework on the proposed system of commodity taxation to be implemented from April 1. But on the crucial question of the level of preparedness of various States to implement such a law, the Committee is delightfully vague. It claims that most States have "either already modified or agreed to modify their VAT Bills... " The reference here is to those points of law on which a consensus has been hammered out among the Finance Ministers. But with less than three months to go for the national-level implementation of what is arguably a radical piece of commodity taxation, the absence of concrete information of the number of States which have incorporated these changes and those that have not does not inspire confidence in the ability or even the commitment to switch to this new regime.

The scepticism is only reinforced by the knowledge that implementation deadlines have in the past been missed repeatedly. An unfortunate outcome of this mad rush by the States to fall in line with the latest deadline is that the local merchant community and the tax-paying public, in general, would not have had a chance to debate the implications of the various new clauses. The Committee's insistence on a synchronised implementation across all States is a bit hard to understand. If the experiment of implementation of VAT has been such a success in Haryana, as is touted, why cannot States be allowed to do so at their own pace? Indeed, a staggered programme of implementation would be more advantageous for the Centre: the fiscal impact of its commitment to compensate the States for the possible loss of sales tax revenue could be spread over a number of years instead of its having to absorb it all in one year. Even from the point of view of ironing out hitches in implementation at the State level, the Committee could focus on the set of States implementing VAT at a particular point in time instead of having its energies dissipated in the case of simultaneous implementation.

It is also hard to fathom the Committee's insistence on putting the States into a straitjacket vis-a-vis the tax rates, as witness its reluctance to confer any discretion for foodgrains beyond the first year. For now, it can take some comfort from the fact that the arrangement would be reviewed at the end of the year, giving the impression that it has retained for itself the final say on the subject. But does it really believe that it can bring in uniformity in the tax rates on foodgrains in a nation with vastly differing dietary habits? True, differential tax rates cause their own distortions in the inter-regional trade. But, then, the existing system of sales taxation is a greater source of distortion in the current fiscal arrangement. Delaying the implementation of a system of unified value added tax incorporating excise duty, service tax and sales tax of which the present State-level VAT is a precursor, would do greater harm to the cause of distortion-free trade than any kinks that a flexible VAT might offer.

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