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VAT countdown

A THREE-WEEK DEADLINE is ticking for States and Union Territories which have been delaying two things: The implementation of uniform floor rates of sales tax, and the withdrawal of sales tax incentives for industrial investment.

Delay beyond July 31 could be costly, because the Centre -- empowered by the conference of State Chief Ministers on Value Added Tax (VAT) -- can wield the stick by withholding Central assistance and grants. All States, except Jammu and Kashmir and the ne wly formed ones, have to go VAT by April 1, 2002 and use the Permanent Account Number (PAN) as the common business identifier. India can then join the 100-odd countries that have a VAT system in place.

The original zero-date -- April 1, 2001 -- had to be pushed back due to the complexities involved in such a significant overhaul of the tax system, and one hopes the current extension will not be stretched again. In November 1999 the Finance Ministers of various States took the first decisive step towards ushering in a system of VAT, replacing the existing sales tax regime. The system of Central excise was overhauled by bringing in a uniform Central VAT (CENVAT) of 16 per cent ad valorem on all manufact ured goods with few exceptions, to make it easier for a future switch to full-fledged VAT. The Empowered Committee of State Finance Ministers, chaired by Dr Asim Dasgupta (West Bengal), has drawn up a time-table for a transition to the VAT regime. It has also recommended that the Centre amend the Central Sales Tax Act to make it simpler and easier to operate. If all goes as planned, CST may plummet to one per cent by April 1, 2003. And reforms are likely in the Indian Stamp Act, 1899 too, as a part of e fforts to streamline the domestic trade tax structure.

On the issue of levy of VAT on services, a further study is on and the Finance Ministry, as also the State Finance Secretaries, would draw inputs from the Govind Rao and Parthasarathy Shome reports. The Tenth Plan Tax Advisory Group, headed by Dr Parthas arathy Shome, had plumped for proactive and rational tax measures by State governments to garner more receipts from services, rather than the `sporadic efforts' of the Centre, with attendant administrative complexities and feasibility factors. Prof M. Go vinda Rao of the Institute for Social and Economic Change, who headed a committee on services tax, had noted how the selective service tax raises about Rs 2,200 crore -- just about 0.2 per cent of GDP or 2.6 per cent of total tax revenue. The total indir ect taxes collected from the services sector by Central and State governments together is only one per cent of GDP or 6.6 per cent of total tax revenue, and almost 80 per cent assessees had turnover below Rs 10 lakh but contributed to less than 3 per cen t of the total receipts in 1999-2000. As Prof Rao opines, it may be desirable to exempt all service-providers with turnover below Rs 10 lakh until the tax is merged with that on goods.

With the removal of quantitative restrictions leading to competition from imported goods, the cascading effect of the present sales tax system is seen as the villain making the domestic products lose out in the market place. VAT can eliminate the cascadi ng effect as it would capture the `value-addition' in a rational manner and help States garner more revenues. One study estimates that over the last decade, the ratio of States' own revenue to GDP has remained more or less constant; and that a comprehens ive VAT on goods alone could enable the States raise at least 0.5 per cent of GDP from the taxation of value added in trade. What is needed is the enthusiasm of States such as Andhra Pradesh, one of the early movers in computerising all aspects of the ta x department; VAT preparedness is a continuing theme through the current year in AP. For most States, however, worries are on three counts: a reliable information database since computerisation holds the key to successful implementation; possible revenue loss, notwithstanding the Finance Minister's promise that the Centre would compensate the States for such losses initially and his citing international experience that none of the countries which had introduced VAT had lost revenue; and problems attenda nt on including services within the VAT regime in spite of the incentive that the revenues could be buoyant in this sector.

Buoyancy seems to be the carrot for the States, labouring under dismal growth rates of sales tax collections leading to revenue deficits. For some, revenue deficit is as high as about six per cent of the State's domestic product, and fiscal deficit inchi ng to eight per cent. That is why much thought is going into new methods to levy agricultural income-tax and blend electricity charges into the VAT net.