D. K. Acharyya

D. K. Acharyya on areas that State VAT laws may not address

SOME of the State governments are all set to introduce VAT from April 1, 2005. They have already introduced VAT Bills in their respective Legislative Assemblies. Since the West Bengal Finance Minister is the Chairman of the `Empowered Committee of the State Finance Ministers on Sales Tax Reforms', let us consider the West Bengal VAT Bill, 2003 as a model legislation. In fact, the Bill has already been enacted by a notification published in the Kolkata Gazette Extraordinary on December 27, 2004.

The `Statement of objects and reasons' makes it clear that the existing sales tax structure is creating a cascading tax burden, resulting in adverse effects on the economy. The VAT scheme, the statement says, will not only encourage trade and industry, but will also augment revenues through a widening of the tax base and better tax compliance.

The West Bengal VAT Act, 2003 is a well-constructed piece of legislation, with nicely structured and appropriately sequenced schedules. Consider, first, the schedules. Schedule A lists out goods for which no tax is payable. These are daily necessities, and include 41 types of goods. Such a large list of exemptions from VAT explains why in spite of the inherent buoyancy of VAT, State governments insisted on a commitment of compensation, within a time horizon, from the Central Government. The more comprehensive VAT is, the better would its all round effect (including revenue buoyancy) be.

But exemptions for goods of daily use are a political necessity whatever be the political hue of the government of the day.

Schedule B lists goods taxable at one per cent, and these include gold, silver, ornaments of gold and silver, precious stones and tea. Schedule C contains the list of goods taxable at four per cent. The number of such goods is 89 in Part I of Schedule C, including item Nos 42 and 47 for IT products and industrial inputs respectively.

Schedule D is the residuary schedule of goods for which the State Government has taken the power to fix by notification, rates of tax not exceeding 30 per cent of the turnover of sales.

Schedule E is for amendments to the West Bengal Sales Tax Act, 1994 and also for empowering the State Government to fix rates of tax on country liquor, foreign liquor, motor spirit, and so on.

Problem areas

The classification of industrial inputs and IT products under the West Bengal VAT is aligned to the Central Excise Tariff. But the other goods, particularly in Part I of Schedule C, are not in line with the Central Excise Tariff.

Further, the Rules of Interpretation of the Central Excise Tariff Act along with the explanatory notes which are followed by all the member-countries (more than 160) of the World Customs Organisation are made applicable only to the industrial inputs appearing in Part III of Schedule C.

It is not understood why the other goods appearing in Part I or even the IT products in Part II of Schedule C are not subjected to the same Rules of Interpretation.

Similarly, capital goods, though defined in the VAT Act and following practically the same definition as in the Central Excise Act, 1944 and the Cenvat Rules, 2004, have not been mentioned with reference to the Central Excise Tariff headings or sub-headings.

There may be some classification and interpretational problems, which can be addressed only if the VAT Schedules are brought in line with the Central Excise Tariff Act and the Rules of Interpretation.

In the Cenvat system, credit of duty in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer.

But the credit of duty in respect of capital goods is allowed up to 50 per cent of the duty paid in a given financial year and the balance credit can be utilised in the next financial year.

Initially, when Cenvat credit of capital goods was introduced, the entire credit could be taken in the same year. But this reduced the flow of cash revenue and, hence, the restriction of 50 per cent credit in the first year was made.

State governments have to give thought to the timing of utilising of credit — for inputs as well as capital goods. In the West Bengal VAT Act, there are provisions for input tax credit. To take full advantage of globalisation, particularly in the domain of export, export products are to be fully exempt from all taxes.

In the Central Excise Act, there are well-laid-down rules and procedures for moving export products under bond, so that no Central excise duty is required to be paid, not only on the export product but also on the inputs used in the manufacture of export products.

The VAT Act has similar provisions so long as both the finished export product and the inputs are manufactured in one State. But when the export product is manufactured in West Bengal and the input is manufactured and sold, say, in Tamil Nadu, then the Central Sales Tax on the input cannot be taken credit of when the export product is manufactured in West Bengal and exported.

The State VAT legislation cannot address this problem. This can be solved only by abolishing the Central Sales Tax Act.

A globalised economy requires a globalised fiscal system of which VAT is a key component.

(The author is a former Additional Secretary to the Finance Ministry.)

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