'Mata Hari of the tax world'

VALUE ADDED TAX ACROSS THE WORLD - A Cross-Country Comparison: S. Gurumurthi; Vikas Publishing House Pvt. Ltd., 578, Masjid Road, Jangpura, New Delhi-110014; Distributors: UBS Publishers' Distributors Ltd., 6, Sivaganga Road, Nungambakkam, Chennai- 600O34.

Rs. 375.

THE DECEPTIVE simplicity of the concept of Value Added Tax (VAT) arising from a description of its incidence just being on the additions of the price of a product at its different stages of entry into the market, either as a raw material or as a component, should obviously have led to tax administrators having sought to introduce its imposition as a revenue augmenting measure.

When they got down to the task of levying it in a number of countries ranging from Argentina to the United States, the complexity of the task began presenting itself. Hopes of the VAT replacing the other taxes ranging from excise duties to sales tax could not be easily realised and the task became even more difficult for federal governments with the states vigorously objecting to the attempts of the Central Government to what they saw as its designs to impoverish them.

Dr. Gurumurthi, an experienced IAS officer and former Finance Secretary to the Government of Tamil Nadu as well as a staff member of the International Monetary Fund, makes a thorough analysis in his present book on the principle and administration of the VAT in several countries and discusses the scope for its introduction in India. He sees the VAT as ``the tax of the 20th century'' which, however, has since receded.

The formidableness of the task involved in replacing even by stages the sales tax in India with the VAT could be seen from both the share of it by the Centre and the states and its percentage of total tax revenue. The author points out that the share of sales taxes of the Centre and the states had increased from 12 per cent in 1960-61 to about 21 per cent in the 1990s.

As a percentage of the total tax revenues of the states, the increase has been from 26 per cent to 38.5 per cent during the same period with most of the states levying tax on raw materials and other inputs. This should be seen as a reflection of the country's economic and industrial progress and the inducement it has given to governments to extend the levy of sales tax on work contracts, hire purchases and leases. It would have been surprising if in such a scenario the states did not object to what they would rightly seem to them to be an effort of the Centre to impoverish them of their revenues by resorting to the levy of VAT unless they are fully compensated under the provisions of tax devolution.

These and other matters are exhaustively discussed in this book. Attention is drawn in this connection to how matters relating to the Union excise duties and sales tax were examined in detail much earlier by the Fourth Finance Commission to invite attention to how the resort to the VAT could make a justiciable sharing of the indirect tax sharing even more difficult than it is at present.

The Commission pointed out quite bluntly that any dilution of their power relating to sales tax ``would mean a setback to their efforts for the growth of industry and trade.''

The author examines matters relating to objections about ``alleged administrative and compliance costs associated with the VAT could lead to larger tax evasion and overstated claims for tax credit and concerns expressed by trade unions regressively of the VAT'' raised in Australia. Nevertheless the attractions held out by the VAT led to its being seen as the ``Mata Hari of the tax world''. As a broad-based tax measure it holds out the hope of generating large and buoyant revenue and expands the range of taxable goods without having any adverse impact on the growth in production.

To ensure that the VAT lives up to the hopes reposed on it will require error proof administrative measures. The decision of the U.S. Government not to resort to the VAT, in spite of its having been interested in it for many years, and its not being satisfied with its existing states' retail taxes, arises from its anxiety not to usurp the powers of sales taxation by the states.

Dr. Gurumurthi also examines the ``origination'' and ``destination'' principles thrown up by questions arising from whether the VAT should be levied at the point of production or at the stage of being a finished good. He points out that the origin principles would introduce production inefficiencies and implies a certain degree of positive or negative protection of domestic production for each country depending on its tax rate relating to its trading partners.

Among the other points examined by the author is the Modified Value Added Tax (MODVAT) to which increasing attention is now being given by finance ministers and administrators. He takes note of the fact that the principle of MODVAT has not appreciably reduced the complexity of tax administration with the tax rates still being replete with multiple in their incidence and the exemptions they provide for.

But the Tax Reforms Committee headed by Dr. Raja Chelliah, recommended for the extension of the MODVAT at the Centre to most commodities and the rationalisation of the sales tax system at the state level. It also recommended the extension of the central sales tax system to the wholesale stage which should be defined as traders buying from the manufacturers and selling to other manufacturers or traders. Among the benefits claimed for the VAT is that it is ``less distortionary than other forms of taxation.''

The author's exhaustive study of the VAT does full justice to a subject which does not lend itself to a facile analysis.

CVG

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