The Hindu Business Line : VAT full of promises

While no doubt VAT implementation is a State subject, Mr P. Chidambaram could have made a positive statement on the commitment of the Centre to usher in VAT. Also, a positive announcement on a reduction in the Central sales tax rate and its eventual phase out was expected.

Compensation to States

The Finance Minster has stated that international experience as well as that of Haryana suggests that VAT will lead to an increase, and not a loss, in revenues. Nevertheless, to pacify the States, Mr Chidambaram has proposed to evolve a formula for determining the compensation for the loss of revenue, if any.

The emphasis on revenue loss, if any, seems to mean that the Finance Minister believes that there may not be any revenue loss on transition to VAT. This appears to be wishful thinking, not based on any empirical data.

While Haryana will be a case study on successful implementation of VAT, it is to be appreciated that the revenue buoyancy in Haryana is not because of VAT implementation alone. The revenue neutral rate (RNR) projected in Haryana was only 11 per cent.

The rate of tax in the erstwhile sales tax regime and the current VAT regime in Haryana are almost identical and obviously there could be no revenue loss at all. The projected RNR of Haryana was the least among the States — in most of the States it is in excess of 15 per cent. Further, Haryana has achieved a good industrial growth rate which would have also contributed to the revenue buoyancy.

Rather than the Finance Ministry evolving a formula for determining the revenue loss, it would be advisable to assign the task to the 12th Finance Commission whose term has been extended till December 2004. The Finance Commission has the necessary inputs and is best equipped to handle the contentious issue.

VAT, would be a non-starter, if the Finance Minister fails to find a satisfactory solution to the issue of compensation of revenue loss to States.

Convergence in legislation

The Finance Minister has stated that the services of a Technical Experts Committee would be made available to the States and that the Committee will work with the States closely, and help them move steadily towards the stage of implementation.

What is required is convergence in the VAT legislation of the States and the Centre should be play a proactive role in initiating dialogue with the Empowered Committee and persuade States on convergence in VAT legislation so that the law is uniform throughout the country.

(The author is a Madurai-based chartered accountant.