The Hindu Business Line : Economists urge debate on VAT issues

RAISING the issue of whether the States will actually benefit or not, when the existing sales tax structure will be replaced by value added tax from April 1, 2004, and also whether this would mean depriving the States of powers of levy of sales tax as guaranteed by the Constitution, economists like Dr Ashok Mitra and Prof Nirmal Chandra have called for a fresh debate on the subject.

The questions broadly raised by the experts are simply this: Will replacement of ST with VAT make life more difficult for the large SSI sector?

Can the Centre, through VAT, take away the sovereign powers of the States to levy sales tax?

Will it affect the independence of the States in a federal structure?

Citing the Supreme Court's clear-cut pronouncements in the Keshavanand Bharati case, fully protecting the constitutional rights of the States, the economists said the issues involved were both political and constitutional, requiring a thorough national debate.

Participating in an interactive session organised here on Tuesday by the Committee of Public Affairs (an independent forum for discussing public issues), Dr Mitra wondered whether the States would actually benefit under VAT, given the many grey areas which have been left unaddressed.

Citing the fiscal and legal dimensions of such a move by the Centre, which according to him may further debilitate the financial muscle of the debt-ridden States, Dr Mitra said it may also hamper the States' ability to discharge their various constitutional responsibilities towards agriculture, industry, education, health etc, leading to social unrest.

It is felt that both constitutional rights and the independence of the States should be protected.

According to Prof Chandra, the concept of a uniform VAT rate among States in a federal structure was sheer myth, as it has happened anywhere in the world.

Citing historical reasons, he said in a federal polity, the basic purpose of a State excise/ST structure (mostly differential because of the economic disparity between States) was to ensure free flow of goods and services between the States to create a common market, somewhat akin to the European model.

But the key problems in a hugely populated country like India for full scale VAT implementation was the proliferation of small scale manufacturing units, which actually generate employment and lack of a single wage structure.

Pointing out that in West Bengal, the VAT bill was passed without any debate as such, he feared that VAT may even introduce greater regional imbalances.

He said while the empowered committee of State finance ministers have met in Delhi to finalise everything, including the compensation package (to be implemented in a phased manner) for notional revenue losses, not a single structured study has been released by the Centre till date on how the States will benefit through VAT implementation.

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