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COIMBATORE, March 10

THE real beneficiary of the Value Added Tax (VAT) regime will be the Central Government and not the States since it will gain by aligning Indian business practices with those prevailing abroad, the State Finance Minister, Mr C. Ponnaiyan, has said.

Though VAT has been introduced in around 140 countries, initially it was a failure even in countries where honesty was being given significant importance, he said.

The long-term impact of the introduction of VAT in India, slated for next month, was also not sure at present and some of the States have even said that they would go back to the older system of taxation if VAT resulted in lower tax mobilisation, he said.

Speaking at a seminar on `VAT Concept', jointly organised by the Indian Chamber of Commerce and Industry (ICCI), Coimbatore, the Southern India Engineering Manufacturers' Association (Siema) and the Coimbatore District Small Industries Association(Codissia) here, he said it was estimated that Tamil Nadu alone would suffer a revenue loss of about Rs 2,400 crore in the first year of VAT's introduction.

Pointing out that compared to other countries the `civic responsibility' was to certain extent `missing' in India, he said some of the States had doubts as to whether VAT could be implemented successfully in the country even if such a doubt is not shared by the Centre.

He said as far as Tamil Nadu is concerned, the fear is that the introduction of VAT would entail a likely loss of about Rs 900 crore in the first full year in `one category alone'. When VAT is introduced in all categories, the loss due to scrapping of AST, surcharge removal, phasing out of the CST, which in the first phase is being cut to 2 per cent from 4 per cent etc is likely to be Rs 2,400 crore in the first full year of implementation for the Tamil Nadu Government.

Mr Ponnaiyan said the experts in the field have expressed the view that the revenue loss would come down over a period of time. The Centre, reposing faith in the views of the experts, has assured that it would reimburse the revenue loss suffered by the States due to introduction of VAT in the first three years at the rate of 100 per cent, 75 per cent, 50 per cent and then it would be zero.

Though the States opposed VAT, as India has become a signatory to WTO agreement, the Centre has brought about this measure so as to be in line with international norms. But he said when the new system is introduced, the Centre would be the `real beneficiary' and not the States.

This is because more than the States, the Centre reaped the benefits of Indian business practices aligning with international norms. When the country becomes export competitive, the increased foreign exchange earnings benefited the Government at the Centre rather than those at the States since export earnings were brought under zero-VAT, he argued.

The Finance Minister said the States, including Tamil Nadu, were seeking some compensation from the Centre on export earnings. Due to eventual abolition of Central Sales Tax (CST) to ensure uninterrupted movement of goods across the country, the State would lose annually Rs 1,000 crore.

He said the Centre has given the assurance that the States would be able to recoup the revenue loss due to VAT after three years and some States have even cautioned they would drop VAT if these projections did not prove to be correct.

Mr Ponnaiyan said VAT should bring revenue to the States' kitty. The trade and industry needed VAT and it should be followed sincerely. But if people look for loopholes in law for exploitation, then the exercise would end up in failure.

He said VAT also would result in a substantial increase in Income-Tax earning for the Central Government. With increasing computerisation of all transactions, "escape will not be there, deviation is very difficult". There would be considerable revenue augmentation for the Central Government because of the introduction of VAT.

Mr S.M. Veluswamy, the State Minister for Commercial Taxes, clarified that VAT was not a multi-point tax. There were several tax advantages and discussions have been held as to how this could be implemented without causing harassment to trade and industry and without any revenue loss to government.

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