The Hindu : Ill-prepared for VAT

Online edition of India's National Newspaper
Thursday, Mar 27, 2003

Opinion

Opinion - Editorials

Ill-prepared for VAT

THE WAGES OF an inadequate preparation for the introduction of a State value-added tax (VAT) are being paid on the eve of the April 1 deadline for the switchover. A number of lobbies and pressure groups have been pressing for either a postponement or a modification of the proposed VAT regime. While some of these pressures are clearly the work of interests which expect the scope for tax evasion to be considerably reduced in a VAT system, there are many genuine concerns that cannot be wished away. With less than a week to go before the scheduled shift from sales tax to VAT in all the States, the Central and State Governments have a tough choice to make between going ahead and postponing the changeover. Considering the poor state of preparedness among a number of State Governments and the concerns of traders and consumers, there is on balance a case for postponement even at this late stage.

The shift to a VAT regime at the State level has been under discussion for almost a decade and an Empowered Committee, which was chaired by a Chief Minister, took the final decision on a "consensual" basis. So it cannot be said that the decision was either rushed through or forced on the States. But that does not mean that the administration and the traders/retailers are prepared for what will be a fundamental change in the system of retail taxation. The superiority of VAT stems from the fact that it prevents the cascading impact of taxation, it is transparent and reduces the scope for evasion. Superior VAT may be, but it also demands a superior form of administration and rigorous compliance by those who collect the tax. This is where the many years of so-called preparation have failed to make either the State Governments or the retailers comfortable with the shift. In a number of States, the sales tax administration simply has no clue as to what is to come. So too the retailers who have not been made familiar with the considerable documentation that accompanies the levy of VAT. The fault here is entirely that of the State Governments, most of whom have been casual about preparing for the new tax regime. Still, sticking to the April 1 deadline raises the possibility of a breakdown in tax administration in a number of States with a consequent loss of revenue and retail business being paralysed. While there have been three postponements since the first switchover scheduled for April 1, 2000, it is better to be thoroughly prepared than to rush through to what is on paper a better form of retail taxation. At the same time, there are vested interests that are using the lack of preparation to stall the move to a retail VAT. The trading community in Delhi — the original natural support base of the Bharatiya Janata Party — is out to scuttle the dismantling of the sales tax regime on the ground that Delhi will lose its "distributive" (trading) character. This is just a subterfuge to block the introduction of a system that should largely plug the widespread evasion of sales tax.

There are also some fundamental problems with the proposed VAT regime. The flat all-India rate of a 12.5 per cent VAT is not the best way to prevent inter-State tax competition. A floor rate is a better option, not the least because it leaves powers with the States to choose the tax rate best suited to their needs. The imposition of a uniform 12.5 per cent on most commodities will also result in prices of some essential commodities going up; the price of medicines is one example, which has already seen the pharmaceutical trade cause disruption with a one-day strike. Fiscal experts have also raised other basic questions like the need for a graded shift to a destination-based VAT that would be accompanied by a gradual elimination of the Central Sales Tax. Convincing arguments have been made against "zero-rating" of inter-State transactions (i.e., no tax on goods when they cross State borders) on the ground that the level of monitoring and computerisation required to contain evasion in this system is beyond the Indian tax system.

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