The Hindu : VAT next?

Online edition of India's National Newspaper
Saturday, May 03, 2003

Business

Business

VAT next?

By C. R. L. Narasimhan

Any new timetable for VAT will appear as daunting as the several more leisurely ones that were abandoned.

It looks highly unlikely that even the new date set for introducing the VAT from June 1 will not be met going by the Finance Minister's statement in Parliament. It is worth pondering as to why it cannot be implemented even in its fourth attempt.

In January this year, it looked as though its (then) revised schedule — April 1 — would be adhered to never mind the overwhelming evidence pointing to the lack of preparedness. The decision to postpone was taken very late but did not come as a surprise. In fact just days before April 1, there were few who believed that VAT will advent.

A few others had maintained that even if it did its initial contours would be far different from what was claimed.

The level of confusion and uncertainty over the practical aspects of this admittedly superior indirect tax system has been so great that even on April 1 many representatives of trade associations were completely in the dark, there being no definite information as to whether the VAT had arrived.

The clarification by the Union Finance Ministry attributed the postponement to legislative delays at the States' level. Only seven States had sent in their VAT legislation to the Centre by the end of the last financial year. A new date June 1 was decided upon but this time even the initial enthusiasm has not been as great as it was last time. Only 16 States and union territories have agreed to join in the first instance. As expected nothing had changed since then.

The Finance Minister, while replying to the debate on the Finance Bill 2003 has expressed serious reservations over introducing such a major tax reform as VAT in a piece-meal fashion. Even if introduced the coverage will not be uniform, as many states have decided to stay away for the time being.

The crux of the problem devolves on preparedness — at the Centre, the States and the trading community and the consumers. It has been the lack of preparedness that has held back the introduction of the scheme even earlier.

Way back in November 1999 at a conference of chief ministers it was agreed to introduce VAT from April 1, 2002. The one year postponement was justified with the wisdom of hindsight. The revised deadline looked more realistic especially when in January this year the Centre took great pains to remove the States' misapprehensions. A compensation formula to help the State governments to tide over the possible revenue loss in the immediate post-VAT period was announced in January and later reconfirmed in the budget.

Two basic rates of 10 per cent and 12.5 per cent were agreed upon. The Centre also permitted the States to levy a tax on sugar, textiles and tobacco and agreed to modify the Central Sales Tax, which is an impediment to VAT. In return the States were expected to prepare a simple VAT law to replace all the existing legislation such as sales tax, purchase tax and turnover tax. Clearly it is in the last task that many States have been remiss.

Yet behind all the apparent legal delays lie the real obstacles. A far-reaching tax reform such as this one depends on political will. This time some State governments, notably Delhi had taken a tough posture against VAT. Then there have been the bandh calls and other forms of agitation by the traders across the country. A politically influential class such as traders cannot be antagonised in an election year.

Their opposition was to be expected but are the better equipped corporate sector prepared for VAT? For them as well as many other taxpayers, the VAT is an improvement over the current sales tax regime.

Each entity in the manufacturing and distribution chain will have to pay tax only on the value addition done by it: the input tax credit will take care of it. It will also ensure that the cascading effects of the state taxes will be avoided leading to lower manufacturing cost. Against this are a number of likely practical difficulties. On inter-State purchases for instance claiming a credit is going to be difficult. Also, for those inputs which go into those goods that are in the exempted category. The VAT assumes that every point in the supply chain of a company can be easily identified for value addition.

Even if one link is not eligible for claiming an input tax credit the benefits of VAT will not be reaped.

Even more serious are the attitudinal problems that have made the progress towards VAT extremely tough. The onus of claiming credit will be on the tax paying entity. The whole system, as the Finance Ministry has claimed, is based on desirable traits such as simplicity, less official intervention and self-assessment.

Although an opportunity has been missed, it will be necessary to first educate the taxpayers and the lay public alike as to the virtues of the VAT system.

Meanwhile the uncertainty over VAT has taken a toll on all types of business. Essentially the confusion over its incidence — even the tax administrators are unable to clarify in many cases — has made sections of trade and industry wary of lifting stocks.

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