VAT in Karnataka by April: Krishna

By S.K. Ramoo

BANGALORE, JULY 10. Karnataka is optimistic of fulfilling its commitment to the Union Government on the introduction of the value-added tax (VAT) system in place of the existing commodity taxation by April next year and has made considerable headway in the process of its enforcement.

The Chief Minister, Mr. S.M. Krishna, who holds the Finance portfolio, had made references to it in his Budget speech in the Assembly.

Karnataka is one of the few States, which has conducted an in- depth study of issues and options available following the switchover to the VAT regime and evolved a methodology for its introduction, according to Mr. V. Madhu, Commissioner of Commercial Taxes.

Five committees consisting of 75 officers of the Commercial Tax Department are currently engaged in studying various implications that will arise out of the introduction of VAT. The department has initiated public discussions on the issue and formulated detailed notes on micro issues relating to tax base, its determination and preparations for putting in place the required infrastructure for initiating reforms in the tax structure.

The department has also made a detailed study on the implications that will arise after VAT replaces the current mode of taxation and it has evolved a road map following generation of substantial analytical and background data. It is currently engaged in the exercise of reorientation of its staff for meeting the challenges arising out of the introduction of VAT.

Mr. Krishna has urged the NDA Government at the Centre for ensuring that all States and Union territories simultaneously switch over to the VAT system by April next, the deadline set by the Union Finance Ministry, and urged the Centre to undertake the following measures prior to its introduction. They include empowering the States to levy tax on all kinds of services, including advertising, marketing, transport, financial services and consultancies, on a ``destination principle''.

He has sought a comprehensive enactment for permitting the States to create an arrangement similar to the Central Sales Tax Act (CST) with a provision for input tax rebating, and powers for the States to levy multi-point VAT on additional duties of excise (ADE) and declared goods.

Mr. Krishna wanted the quantum of compensation to be paid to States by the Union Government for the likely revenue loss, following the switchover, to be calculated on the basis of their 2000-2001 revenue plus previous three years' average annual growth rates. He pleaded that provisions for this be made in the Union Budget and wanted compensation to be paid for a three-year period on a monthly basis till its stabilisation.

He sought powers to the States for levying tax on imports meant for direct consumption from outside the country, which according to him was eroding the State's tax base. He wanted the Centre to fully meet the cost of computerisation involving the VAT scheme for plugging revenue leakages.

Mr. Krishna gave a call to other States to join Karnataka and those who have abolished the sales tax-based industrial incentives and exemptions granted in the past as they had compounded the problem of declining tax revenue. Prior to January 2000, all States competed with one another for luring industrial investments, following creation of artificial tax rate differentials, which eroded their tax base and led to deprivation of tax buoyancy.

As against this, it is surmised that VAT will create a ``level- playing'' tax environment among the States, which will ultimately pave way for a holistic reform process in their tax administrations.

Interestingly, the State Commercial Tax Department has favoured the abolition of turnover tax, entry tax and infrastructure development cess, and suggested that the new industries availing concessions be brought under the VAT system for the unavailed period.

The State Government will be facing a challenge in the integration of the VAT regime with the tax incentives and exemptions already sanctioned to industries. Under it, such exemptions cannot co-exist. The Karnataka Tax Reforms Commission, headed by the former Chief Minister, Mr. Veerappa Moily, in its first report, recommended the establishment of a VAT Monitoring Cell and urged the Centre for the restoration of the power of the States to levy sales tax on sugar, textiles and tobacco.

Mr. Madhu cautioned that the switchover to the multi- point VAT might not initially yield the desired results, including tax buoyancy, as it has to gain widespread acceptance and stabilisation over a period of time.

He felt that Karnataka had to harmonise the ``pains of tax reforms'' with the gradual gains in revenue growth, and said the Government would have to evolve a ``pain-gain equation'' for widening its tax base.

The State tax reforms are imperative for ensuring a buoyant revenue flow, voluntary tax compliance and for curbing tax evasion and other corrupt practices.

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Section  : Southern States
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