The White Paper on state-level value added tax (VAT) mostly sets out what was already known, while introducing some modifications in the scheme. What is important is that its publication sets the stage for the launch of the state VAT in April. | |
| That the country's fiscal managers have got to this point is in itself an achievement, since two previous deadlines had been missed. State governments (barring Uttar Pradesh) have passed the necessary legislation, and in a persuasive act of generosity the Centre has underwritten the whole exercise for the initial years. |
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| This will therefore mark a watershed in the country's fiscal history, being a crucial step in the transition to a thoroughly modern tax system. |
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| It is possible to argue with some of the details. For instance, there should not be such a wide differential between two tax slabs (4 per cent and12.5 per cent). |
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| The VAT principle usually means a flat rate of taxation at each link in the value addition chain; a big difference between two rates could lead to classification disputes, although the White Paper mentions specific lists for each category. Also, the complications of a federal fiscal structure have meant a variety of compromises with a neat scheme of textbook purity. |
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| Thus, the central sales tax will continue for the time being, and critics have pointed out that nothing short of an amendment of the Constitution can take away the states' right to levy the sales tax. If states do act perversely on this count, the benefits of a VAT system will become illusory to many. |
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| Also, some items will apparently have different rates of tax in different states, and there is a long list of exempted items. |
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| There is also the compromise on an exemption limit, caused no doubt by the concerted protests of small traders (most of whom usually manage to avoid paying tax and who will naturally will resist any tax system that spreads the net more effectively). |
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| So, although the tax rates have built in a large revenue cushion, it is possible that the actual introduction of the new system could be accompanied by a fair amount of confusion and even a revenue loss. The finance minister is known to be a man for detail and not just the big picture, so it must be hoped that the 'i's have been dotted and 't's crossed (unlike in the last Budget). |
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| But given the inherent complexity of the exercise, the differences in state legislation and industry's general lack of familiarity with what is proposed, fingers must remain firmly crossed while hoping for the best. |
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| This should be the first of several steps that must follow. The government should work towards integrating the state and central VAT systems at some stage, and this will require changes to the Constitution. |
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| It must also work towards integrating the tax systems for manufacturing and services""as has been suggested by Vijay Kelkar. It must computerise the tax collection machinery and records, and put in place a comprehensive tax information network that will allow full coverage of all taxable output. |
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| While the economy approaches a watershed change, there is a lot of work to be done before it has an indirect tax system that compares with the best in the world. |
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