Empty VAT

Despite the brave face put up by the West Bengal finance minister, Asim Dasgupta, who heads the empowered committee of state finance ministers on a state value-added tax (or VAT), it is now a clear possibility that the deadline for introducing a state VAT may once again be breached, as it has been on two earlier occasions.

The reason, should it happen, will be the same as it always has been—the traders’ lobby is goading sundry politicians to come up with one excuse or another to derail the process.

On Monday, Mr Dasgupta said that VAT would be implemented with or without Uttar Pradesh, the state that is protesting the most, but if one state doesn’t implement VAT, its immediate neighbour tends to follow suit because it stands to lose business to the neighbouring state that has lower rates of taxation.

In any case, states like Chhattisgarh and Rajasthan have already said they will not implement VAT and now Tamil Nadu and Madhya Pradesh look like they’re headed the same way.

It is no coincidence that those in the forefront of the move to postpone/opt out are all non-UPA states.

The reason why traders are protesting against VAT is well known—in a well-designed VAT system, it becomes more difficult to avoid paying the sales tax.

If you assume 30-40 per cent tax evasion, this means traders and their politico-bureaucratic friends would stand to lose around Rs 17,000 crore in terms of evaded sales tax revenues each year.

Some states say they will not agree to VAT until there is a clear roadmap on how the central sales tax is to be phased out.

Since the CST is a tax usually paid by the poorer states to the rich industrialised ones (consumers in Madhya Pradesh, for instance, will pay the CST on purchases of colour TVs manufactured in Maharashtra), it is understandable that this should be a matter of concern, but since Jaswant Singh had given an assurance on the road map when he was finance minister, there is no reason to suspect P Chidambaram will not stick to this promise of a 2-3 year phase-out.

If this bogey is got out of the way, there is the demand that the current Rs 5 lakh turnover limit for traders to register themselves in the VAT chain be raised to Rs 10 lakh.

While this is being proposed so that small traders are not harassed by VAT officials, it could lead to the very purpose of VAT being defeated.

Since there is a large gap between the two VAT rates of 4 and 12.5 per cent, there is already a good possibility that VAT will not ensure full compliance—since the VAT rate of 4 per cent on inputs is obviously going to be a small fraction of the 12.5 per cent VAT on output, it is still possible that the final seller of goods may find it worthwhile not to pay this as the loss of tax credit will be much lower.

Any more concessions, though, and the nominal implementation of VAT will be reduced to a farce.