VAT AND STATES : Misconceived Fears
by
Amaresh Bagchi*
Following the initiative of the Union Finance Minister, introduction
of the Value Added Tax (VAT) is now figuring prominently in the agenda of
governments, both at the Centre and the States. While the Central excises are
well on their way to transformation into a manufacturers’ VAT, progress at the
States level seems to be slow and half-hearted. Apart from lack of conviction
about the need for any basic reform such as adoption of VAT would imply,
fear of losing revenue and fiscal autonomy has been a major deterrent. Some
economists have added to these fears by calling the move an intrusion by the
Centre. "Why should the States forgo their revenue from inter-state sales tax
(CST)?", it is asked. This is unfortunate. For such fears and questions
reflect inadequate appreciation of what value added taxation in essence implies
(and why it is necessary to replace our sales taxes with VAT).
That the sales tax systems as they are operating at present are
unworkable cannot possibly be denied. Multiple cascading levies, numerous
rates drawing hairsplitting distinction among commodities, exemptions of all
kinds narrowing the base, "tax war" among the States with bizarre results,
cumbrous laws and procedures,thousands of cases pending before the courts -
all these surely do not conjure up a comfortable picture of commodity taxation
in the country. That taxation cannot be carried on in this way and the
system calls for some radical reform will be readily conceded even by
congenital sceptics of change. It may still be argued, why go the whole hog
towards a destination based VAT to cure these ills? Why not let the States
rationalise and simplify their sales tax systems by incorporating the principles
of VAT such as by giving credit for tax on purchases, eliminating the
exemptions, cutting down the number of rates and harmonising them among
themselves by settling for some floor rates but leaving the CST alone? No
doubt, changes on these lines would help to improve the current system
significantly and cure some of its ills. It must be pointed out however that
this is not quite what VAT is all about.
* Published in the Economic Times, 8 February 1995.