Out of the 16 States that have agreed to introduce VAT from June 1, 2003 only eight States have passed necessary legislation till today. States which agreed to implement VAT from June 1 are Maharashtra, Gujarat, West Bengal, Madhya Pradesh, Karnataka, Andhra Pradesh, Tamil Nadu, Kerala, Haryana, Assam, Orissa, Bihar, Jharkhand, Tripura, Goa and Meghalaya. Among the Union territories, Pondicherry and Daman & Diu have decided to go ahead with the new tax regime from June. In such a situation, it is not good to introduce VAT in few states only.
 

As our Finance Minister says, when we go for an important change in our taxation system, it is better to introduce it all over the country at the same time. Moreover, with the introduction of VAT, Centre has to phase-out the Central Sales Tax. For a few years, Central sales tax (CST) would be levied and collected by States on inter-State transactions and turnover tax or additional sales tax (AST), which is in the nature of a tax on income would be collected even after the introduction of VAT. The AST would be collected as it is not allowed to be recovered from the consumer. With so many follow-up actions to be taken, how can all these be effectively done if some States introduce VAT whereas many others do not. However, the government should not resort to this excuse and delay the introduction of VAT in the country. This would only raise the suspicion that the present government is not serious about it and it is actually yielding to the pressure from traders and vested interests.

The Prime Minister must make sure that there should not be a drift in this policy as it happens with disinvestment policy. This way, we can never bring in any positive change to our economy. There should not be an indefinite delay in introducing VAT. If States do not do the needful within the freshly agreed time limit, Centre should use its legitimate
powers and introduce VAT all over the country. Arriving at a consensus on this issue should be facilitated by the National development Council.

The major advantages of VAT are reduced evasion, corruption and widening the tax base. The 'common market' that would emerge out of this change would help Indian manufacturers to face the domestic and international competition. VAT makes the choice of raw materials and processes independent of the distortion in their relative costs caused by differential taxes on them (as the manufacturer is going to pay the tax only on the value added in creating a product out of raw materials), this would strengthen the competitiveness of Indian products in both domestic and foreign markets. This would also rationalize the cost of many raw materials if they can go into manufacture of different products and so is the case with the final products.


To start with, States have implemented a floor rate (not uniform rate) of
tax on identified commodities and also abolished, with prospective effect, tax exemption/deferral for attracting investment. This would definitely eradicate unhealthy competition between the States. Octroi, entry tax, entertainment tax and similar levies have to be integrated into VAT. VAT makes sense for such a huge country like ours with such a strong Federal system in place. Since too much book/record keeping is paramount for this system, traders to be educated accordingly therewise VAT would not be effective. It would only lead to
chaos.

The Taxing machinery has to be prepared to deal with this increased work load. It is interesting to note that Tamil Nadu passed a legal amendment as far back as 1996 for introducing VAT at the second seller's point (and not till the last retail point) but suspended its operation right from the beginning because of inadequate preparation and failure to enlighten traders on the system. The potential assessees should understand that in the multi-point VAT, tax at every stage will be levied only on the value added by the manufacturer or trader at his point, by giving the manufacturer/trader credit for taxes on his inputs/purchases against the tax payable on his sale. Also, the operation of the system would not involve disclosure of the traders' margin.

In simple terms, it would mean that the overall tax collected by the government on a commodity sold to a consumer /customer would be paid by many in the manufacturing/selling line and each one in the line would benefit as they have to pay tax only for the value added by him in the chain. It is more a rational way to tax a product than the present system. By refunding tax on inputs/purchases, the net benefit to the consumer is that at every stage the tax element added to the cost of the commodity is restricted to the value added at this stage. Thus the price escalation caused by taxing the tax element included in the cost of a commodity at every stage of sale till its last point of consumption is avoided. What is more, under the present system, traders tend to consider the tax element in their purchases as part of their investment and include it in calculating their mark-up or profit margin while pricing.This ``pyramiding'' effect of tax on prices will also go once VAT isintroduced. VAT system would reflect genuine value addition at every stage by way of transportation, packing and repacking, selling costs and the like, and also would reflect the undervaluation indulged in by dealers at the first (and only) point of tax in the current system. There is an inherent policing system introduced or built-in the VAT as the VAT system has an in-built disincentive against evasion because at every stage of sale, the buyer will insist on a proper invoice/bill so that he could claim credit for the tax paid by him on his purchases.

Is it not a big encouraging factor to introduce VAT? The question may arise here if that is the case how does the government get more revenue from VAT. The government can generate more revenue after VAT only if it succeeds in widening the tax base. Also, the States' exchequer would benefit because the entire value addition occurring after the first point of sale will be captured under VAT. In the present system, the value addition after first point of sale is not coming within the purview of States' taxation system. It was found in a study of the electronics sector that the value addition after the first point of sale is 400 per cent. No doubt there is a need for strict alertness, vigilance and a greater creativity/innovation required on the part of tax authorities to collect tax at every stage of value addition. It is going to increase the workload many fold to tax authorities however it would increase the tax collection.

In the existing tax system, for increased revenue, government has to play with the tax percentages and in the new VAT system it has to go after a wider base. This is only logical and rational. However, there are few things to be put in place to manage these effectively and these include computerization at the official level, education of the staff and inculcating an assessee-friendly culture among them and preparation to deal with transitional problems while operating the VAT system.

The unfortunate thing is that not much headway has been made in several States even now in creating awareness about the beneficial effects of VAT. With a proper and effective implementation of VAT, manufacturers, traders, consumers and the tax administrators, would only benefit in the long run and our economy as a whole would gain added strength. However, it should be mentioned that the revenue-neutral VAT rate would tend to be higher than present rates initially to compensate for loss of revenue from phasing out of CST, input tax credit and zero rating of exports and inter-State transactions. However, once VAT leads to the expected buoyancy, the rate can be lowered progressively.

There is a greater amount of education needed for manufacturers, traders, tax-administrators, and consumers if only VAT has to see the light of the day and do the intended good to the economy.