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CHENNAI, Nov. 22

THE Tamil Nadu Government, though ideologically committed to implementing value added tax (VAT), cannot immediately shift to VAT because the resultant revenue loss would adversely affect the State's ability to meet social responsibilities, according to the Finance Minister, Mr C. Ponnaiyan.

Addressing a conference on VAT organised by the Federation of Indian Chambers of Commerce and Industry here on Friday, he said the State could not afford to rush through with the implementation as wished by the industry.

Tamil Nadu could lose about Rs 800 crore revenue annually with the phasing out of the Central Sales Tax if VAT is implemented and it would lose an additional Rs 500 crore if the revenue neutral rate were fixed at 12 per cent because in Tamil Nadu there were higher slabs.

These losses would be in addition to the Rs 500 crore that it would lose from the Centre's allocation following the recommendation of the Tenth Finance Commission.

Unless the State Government was compensated adequately for these losses, it would not be in a position to implement VAT, he said. Alternately, the Central Government could hike the States' share of Central revenue to 50 per cent from the existing 29.5 per cent.

Other State Governments have also expressed similar sentiments on various occasions, but the Centre appeared to be taking the problem `lightly'.

Though the Centre had indicated that it would take action, information reaching through `informal' avenues indicated that the Centre would compensate only a part of the losses, according to Mr Ponnaiyan.

While States like Tamil Nadu that had been categorised as developed were being allocated less funds, the Centre was `politically biased' in its disbursements to States from its discretionary funds. The Centre should discuss such issues with economists and experts concerned, he said.

The industry should first gear up to enhance its efficiency before expecting VAT to be implemented.

While VAT is being touted as a tool to enhance efficiencies and reducing transaction costs, there are other avenues that could be explored.

The industry would have to look at technology infusion, take a lesson from China on production and productivity enhancement, and cost cutting. Raw material management, energy efficiency and technology were a cause for concern, he said.

Effective implementation of VAT called for extensive use of information technology tools and computerisation of operations along the chain from the authorities to the taxpayers. These issues had to be tackled before VAT could be implemented, he said.

Professor Mahesh Purohit, of the National Institute of Public Finance and Policy, called for the establishment of a commission on reforms of States' taxes. Globally common markets were being created and India cannot afford to have diverse market conditions between the States.

An independent authority can be created to enforce the common market mandate of the Centre, and if required Article 307 of the Constitution could be invoked (to establish such an authority to ensure unrestricted trade within India). Limiting taxes such as entry tax and luxury tax were `irrational' and the concept of Central Sales Tax was incompatible with VAT, he said.

Dr Raja Chelliah, Chairman, Madras School of Economics, said the State Government's in-principle decision to implement VAT was significant and important for creating a common market in India. Introduction of information technology tools and extensive computerisation of all taxation departments would be necessary.

Bringing all the registered dealers under the tax net would help enhance the taxable threshold and raise the exemption limit.

This would help to leave out a large number of the small businesses that together contribute less than one per cent of the State's revenue.

But under the existing system less than a third of the registered dealers are in the tax net. The paper work and procedures would also have to be simplified, he said.

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