VAT within service sector mooted

By Our Special Correspondent

CHENNAI, FEB. 10. It is advisable to experiment first with the value added tax (VAT) system within the service sector, before attempting to integrate the service tax with the Central or State VAT systems, Dr. P. V. Govinda Rao, Chairman of the Committee on Taxation of Services, said here today.

Expressing his ``personal views as an economist'', Dr. Rao said though the committee was yet to take a firm view on several aspects, certain facts needed to be highlighted. These included the untenability of the general impression that services were at present almost wholly exempt from tax and that the entire burden of indirect taxes was being borne by the manufacturing industry.

Addressing the two-day conference on value added tax, organised by the Confederation of Indian Industry-Southern Region (CII-SR), Dr. Rao, who is also Director of the Institute of Economic and Social Change, Bangalore, pointed out that the upper end of the hotel and tourism industry, road transportation, electricity and entertainment were already subject to taxation at the State level, while the Centre had introduced service tax on 26 services in the past few years.

Since the States were hardly in a position to introduce a State- level VAT on goods even from April 2002, any attempt to integrate the service sector in a unified VAT, that too without solving the issue of Centre v States' jurisdiction to tax services, would lead to complications. A better option would be to grant to those services which were already in the service tax net, credit against service tax paid by them. For example, service tax on share brokerage that might have been paid by an insurance company could be set off against service tax remittable by the insurer, thus eliminating the phenomenon of cascading (or `tax upon tax') within the service sector.

In the long term, the VAT rate on goods should be lowered and the service tax raised (from the present five per cent) to charge a common VAT at a single rate. Also, all services, except basic health care, basic education and basic government services, should be brought into the service tax net, Dr. Rao said.

Dr. Raja J. Chelliah, Chairman, Madras School of Economics, said elimination of `tax on tax' in the case of inputs implied by the VAT system would boost the competitiveness of the manufacturing sector, while reduction and ultimate zero rating of the Central sales tax (CST) would prevent ``export of tax'' to consumers in other States.

At the same time, reversion to multi-point tax with credit for tax already paid by dealers at various stages of the distribution chain would help collect tax on value-addition in the post- manufacturing stages which at present escaped taxation. VAT would also help eliminate evasion at the first (and, at present, sole) point of tax by dealers (resellers) who falsely claimed to have bought their wares at the second or subsequent point of sale and obtained tax exemption, Dr. Chelliah added.

Mr. Abhay Tripathi, Director-Sales Tax, Department of Revenue, Union Government, said the Centre was only acting as an ``honest facilitator'' of tax reform at the State level, and decisions to fix a floor level of ST for different commodity groups to avoid competition in tax concessions between States, and later to introduce a State-level VAT were taken by consensus by Finance Ministers of the States. There was no ``imposition'' by the Centre, he added.

Prof. Parthasarathy Shome, RBI Professor, Indian Council for Research in International Economic Relations (ICRIER), said the VAT system required countrywide coordination by way of sharing of information and use of information technology to combat fraud.

Mr. P. C. Cyriac, Principal Commissioner and Commissioner of Commercial Taxes, Tamil Nadu, said the recent steps taken by the State like enhancing the self-assessment limit to Rs. 1 crore of turnover and simplification of registration and renewal were aimed at facilitating introduction of VAT. He said one of the proposals under consideration in connection with VAT was to offer tax credit on inputs in the case of branch transfers (namely, consignments sent outside the State to own offices/warehouses) provided the assessees were prepared to treat the purported transfers as inter-State sales subject to CST.

Mr. Cyriac inaugurated the web site, www.indianvat.com, put up by the CII.

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