Hastening towards VAT

THE NEAR-UNANIMITY AMONG the States on switching over to the Value Added Tax (VAT) system from next April can at best be seen as a new resolve to clear the sales tax ``jungle'' which has operated against economic progress. The fact is that since 1995, the Centre has been cajoling the States to move away from counter-productive ``rate wars'' in sales tax, but in vain. Even the time-frame for State-level VAT now agreed upon (April 1, 2002) had been decided in November 1999 at the Conference of Chief Ministers and Finance Ministers. Triumphalism over the outcome of last Thursday's conference of Chief Ministers is thus unwarranted. Even apart from the difficult legislative and administrative terrain yet to be negotiated both by the Centre and the States, the exact manner in which the Centre would use the ``carrot and stick'' approach to get a State VAT system in place in eight months remains imponderable.

Reforms in the system of commodity taxation have proved as vexatious as they have continued to remain the imperatives for newer investments and rapid generation of employment opportunities. If initiatives taken by a few States such as Maharashtra and Madhya Pradesh towards VAT have had to be rolled back, the explanations would perhaps go beyond the fears of revenue shrinkage or mere political timidity. While the case for a comprehensive VAT system for the whole country which would substantially enlarge the tax-base and help the moulding of a vast common market is very strong, the efforts needed in this direction would call for a whole new look at the Constitution of India with regard to the powers of taxation of the Centre and the States. Even apart from this strategic perspective, it is a fact that the Centre, which began its journey towards VAT as early as in 1986 when the Modified VAT regime for avoidance of cascading effects of excise taxation was introduced, has miles to go before an integrated VAT, covering manufacturing and services, can be instituted in the place of the prevailing obfuscations in commodity taxation which have engendered evasion, corruption and protracted litigation.

As for VAT at the State level, notwithstanding the April 2002 deadline, only a miracle would vindicate optimistic expectations. First, there is the problem of enforcing uniform floor rates by July 31. States which have granted exemption from sales tax for ``essential commodities'' adopting varying criteria - covering such products as edible oil and student note-books - are bound to resist the stipulation of an all-embracing tax regime at 4 or 8 per cent. What does the Centre want? A process of confrontation over the heterogeneity of tax rates through the threat of withholding Central assistance? Or a mode of persuasion and reconciliation such that the movement towards VAT does not exacerbate the none-too-salubrious Centre-State fiscal relations?

Second, the revenue from sales tax is a predominant component of State tax revenues. Would VAT, depending on the rate of taxation adopted at multiple stages from the point of manufacture to that of retail sale at the consumer end, augment the State tax revenues or erode them? Undue misapprehensions apart, there can be no presumption that the switch-over to multi-stage taxation would automatically help regenerate State finances. It would not do for the Centre merely to promise compensation for the States in the event of revenue loss. Systematic computational exercises would be needed to project sales tax yields for the States during the next 3-5 years on the assumption of a switch-over to the new model. Nor can the Commercial Tax establishment, at the State level, be reasonably expected to move over to a new VAT regime without a well-planned reorientation and ``re-tooling'' through training. Can all this occur through ``pressure cooking''?

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