The Hindu Business Line : The VAT juggernaut

ONCE AGAIN, AFTER nearly half-a-dozen attempts, the air is thick with VAT (value added tax) calls. The Empowered Committee of State Finance Ministers on VAT has set a new deadline, April 1, 2005, for the introduction of the tax regime. When the much-hyped tax missed its earlier deadline of April 1, 2003, the Finance Ministry had conceded that introduction of VAT in a patchwork form by individual States without corresponding action by others was not a workable proposition.

Inspite of the hard-sell by the Centre then — that VAT is a progressive, transparent and equitable commodity taxation system offering improvement on the existing sales tax system — State governments did not budge or, despite giving commitments to stick to the 2003 date, backed out when faced with idea of revenue loss. Other assurances about VAT given by the then government — that it would help avoid tax on tax through a transparent, invoice-based input tax credit, be based on self-assessment by the taxpayer, make industry more competitive internationally, and that small traders and dealers would be outside its purview — did not seem to enthuse the States enough, with the exception of Haryana. The loner that crossed the Rubicon has reported an impressive 20 per cent rise in tax collections in the first full-year of the VAT experiment, putting pressure on other States to follow the lead, besides reducing the worry lines on the Finance Minister's forehead about compensation to States for revenue loss arising from VAT switchover.

What lends credence to the latest VAT noises is the inclusion of the value-added goal in the Common Minimum Programme, which says "the UPA Government is pledged to the early introduction of VAT after all the necessary technical and administrative homework has been completed, particularly on issues like the integration of service sector taxation and compensation to States." It is creditable that the Empowered Committee of State Finance Ministers could debate both these issues within a month of the new government assuming office. Predictably, there are positive announcements from the Centre about its willingness to compensate States for the revenue losses from the phasing out of Central Sales Tax and the implementation of VAT, and in giving `flexibilities' in dealing with goods of local importance. The coming months should see tough bargaining on these counts between the States and the Centre, on the political front, even as bureaucrats in various States dust off drafts of VAT legislation to prepare for April 1, 2005.

Yet, what could be disturbing is the abrupt shift of focus to taxation of services. States are demanding the right to tax services and collect them on major services to bolster their revenue base. If, in the process of reviewing the draft Service Tax Bill piloted by the Finance Ministry, the above demands are met, a big hole is likely in the Union Budget when service tax disappears from its list of revenue sources. In which case, it may be doubtful if the VAT juggernaut, when it starts to roll, would in fact be an important step towards reducing the Budget deficit.