taxes.
A national VAT in place of all major and minor taxes on goods and
services would no doubt solve most of our indirect tax problems and rid the
system of its inanities. But, given the character of our polity, this option is
not open to us. Nor would it be desirable to divest the States of the most
potent tax power that our Constitution has vested in them. However, given
the will, it is possible to operate a destination-rule VAT within the present
constitutional framework. The European Union provides a model. In order to
complete the creation of a single market, fiscal frontiers within the Union were
abolished in 1993. The destination principle is now operating there through
an accounts based system, relying on computerized information.
The degree of sophistication in tax administration required to run
such a system is not available in India at present. One has to think of
alternatives. As a safeguard against fraud, the recent study of the National
Institute of Public Finance and Policy on the issues and options for VAT puts
forward a proposal for advance payment of tax by the importing dealer to
entitle the vendor in another State to zero-rate his inter-state sales.
Another alternative could be to require inter-state sales between
registered dealers to be taxed uniformly at 2 per cent with rebate given by
the importing State. Ideally, the revenue should go entirely to the consuming
States^ that is, the States of destination. However, to create a stake for the
States of origin to collect it, one half of the revenue may be allowed to be
retained by the exporting State and the other half, pooled for sharing
according to some agreed formula. Sales or transfers to unregistered dealers
would be taxable at the local rate of the exporting state. This arrangement
would have the effect of zero rating (except that a part of the revenue would
go to the State of origin) combined with a monitoring mechanism and also
obviate the need for any tax on consignments. It might l∞k politically
expedient to allow the CST to continue without any set-off to protect the
revenue of exporting States but that would be contrary to the principles of
VAT even if the ceiling on the tax rate is lowered.
It must be stressed that there can be no real reform of the
domestic trade taxes and progress towards a common market in India unless
the States stop taxing inter-state trade. There should be a clear recognition
on their part of the damage that inter-state trade taxation causes to the
economy and the inter-jurisdictional inequity that results from it. No other